CITY HIGHLIGHT, AUGUST 2011

ST. LOUIS CITY HIGHLIGHTS
Don Weis, David Zeigler & Christopher J. Zoellner

St. Louis Retail Market

The first half of 2011 has been a slow and steady climb back to normalcy, but what is the definition of normalcy in today’s retail climate?

The past few years have seen a cleansing of the industry. Amateur developers/cap rate flippers fueled by 100 percent financing are gone. Retailers including Linens ‘n Things, Circuit City, Hollywood Video, Blockbuster Video and Borders are no more. Brokerage houses have contracted, especially those who got in the business when deals were plentiful. Foreclosures have trickled out the past couple of years, but we saw a bump in banks taking back properties at the beginning of 2011, as their patience ran thin and appraisals ran thinner.

So with all that dramatic change how does one remain optimistic?

The demise of a number of junior anchors coupled with a resetting of market rents and changing consumer trends and tastes have created vast opportunities for new retailers to enter markets historically out of their reach. As a result, St. Louis is experiencing a wave of backfilling. While at the time of this article many leases and letters of intent were still being negotiated, look for hhgregg, Big Lots, Ross Dress for Less, Aaron’s Rents, JoAnn Fabrics, Dollar Tree, Dollar General, Chipotle, Panda Express, Qdoba, Jimmy John’s and others to be popping up in a bankruptcy-caused vacancy near you.

In development news, St. Louis is finally seeing some projects come out of the ground.

• THF Realty has two new Walmarts in Bridgeton and High Ridge that are expected to start construction in 45 days or less, as well as two Sam’s Club stores pending in Wentzville, Missouri, and Edwardsville, Illinois.

• Menard’s has a renewed interest in the Metro area and has recently closed on a site at Prewitt’s Pointe II in Lake of the Ozarks and is inquiring about other Metro opportunities.

• A development partnership between Lindenwood University and Desco Group has the wheels turning rapidly on a 34-acre retail/student housing development on First Capitol and West Clay in St. Charles that will be anchored by Schnucks Grocery.

• McEagle Properties is close to moving dirt this fall for a 140-acre site at the corner of Greenmount and Frank Scott in Shiloh, Illinois, with a number of outlot users under contract along with active competition from larger anchor tenants.

• McEagle is also behind the bold Northside development just north of downtown St. Louis at the corner of Tucker and Cass. The project is being built at the foot of the new Mississippi River bridge, which is scheduled to open for traffic in early 2013.

• The famed St. Louis Centre Mall is getting a major facelift and will be redubbed Mercantile Exchange. The project will include more than 100,000 square feet of street-front retail. A movie theater has also committed to the development along with a number of well heeled local restaurants. Part of the development will include residential units and an Embassy Suites hotel in the former Dillard’s building.

• Cullinan is moving dirt for Phase I of the Streets of St. Charles at Interstate 70 and Fifth Street. The fashion-conscious in St. Louis are also eagerly awaiting the September completion of Nordstrom’s at Galleria Mall.

Many smaller 1 to 2 acre end-users are quite active in the St. Louis Metro and are driving much of the deal activity in the market. Buffalo Wild Wings is under construction at Hanley Station in Brentwood, Missouri. Texas Roadhouse has opened in St. Charles, Missouri, next to Bass Pro Shops with another under construction in Columbia, Missouri, on Stadium Boulevard.

Wendy’s is further investing in the St. Louis region with three new restaurants scheduled to join its 24 existing stores by the end of the year, and more are on the way.

CVS/pharmacy, has made a push into the St. Louis Metro with its first seven stores and is pursuing additional opportunities for the coming year. Arby’s recently opened a new store at Tesson Ferry and Towne South in South County. Firestone is now under construction at Loughborough Commons in South St. Louis City. Local and rapidly expanding Massage Luxe, has opened four stores this year with more in the pipeline.

The bottom line is the retail business is brisk in St. Louis. While the pie is small, the number of people requesting a piece is smaller. Retailers, like most investors, are keeping a sharp eye on the moves of our federal government and its effect on the economy, and will remain cautious. Developers with sound balance sheets are playing the dating game with banks who are back on the market, and the pairings with the least baggage are the ones cutting the wedding cake.

A local developer and retail operator said to me about a year ago, “Flat is the new up.” I think we are getting close to being able to say, “Up is the new up.”

 — Christopher J. Zoellner is the owner of St. Louis-based Foundation Commercial.

St. Louis Office Market

Weis

The St. Louis office market is steady, but still appears to be in a lull, waiting for employment gains in the region to help drive absorption and lower vacancy rates. Activity has undoubtedly increased from this time last year in both the leasing and sales markets; but in the leasing market, the St. Louis region is still experiencing “musical chairs,” with tenants moving from one building to another and no net gains in employment.

As of the end of the second quarter, the vacancy rate was unchanged from the first quarter at 17.6 percent. However, there is a high level of variation between submarkets. Downtown’s overall vacancy rate, for example, is 25.4 percent including 17.8 percent for Class A properties, while the Mid County submarket, which includes the popular Clayton area, is at 11.4 percent overall and 9.8 percent for Class A properties. Average asking lease rates, which ended the quarter at $18.42 per square foot for all property types, also vary greatly submarket to submarket.

While the St. Louis office market still has not fully recovered, there are some encouraging signs. As previously mentioned, activity levels have increased, as have the length of leases being signed. During the market’s trough, many firms were renewing leases on a short-term basis of 1 to 3 year increments, but both new leases and renewals are now being inked for more traditional 5-year terms. Tenant improvement allowances also appear to be increasing, with landlords feeling more financially secure to make the commitment to improve space when companies make the commitment to lease it.

From the capital markets side, interest also appears to be picking up as traditional investors jump back into the market. Prices are still depressed from their highs in 2008, so investors in St. Louis may be able to find deals even for Class A properties. Colony Realty Partners of Boston recently purchased Maryland Place, an 80,000-square-foot, Class A asset in Clayton, for $14.7 million. Properties currently being marketed include: Corporate Woods II and III, a pair of suburban buildings; the 325,000-square-foot The Plaza in Clayton; 130 South Bemiston, also in Clayton; the Fireman’s Fund building in O’Fallon; and Corporate Hill, a three-building suburban office park totaling 300,000 square feet.

With vacancy rates still higher than normal, new projects are almost exclusively of the build-to-suit variety. Express Scripts, one of St. Louis’ largest employers, continues to consolidate and expand operations at its corporate campus near the University of Missouri — St. Louis and its newest building, a 234,600-square-foot facility, is under construction. Downtown, the Ballpark Lofts I building is being rehabbed and will have four floors of office space that will be occupied primarily by Osborn & Barr. The most recently built office tower, the 450,000-square-foot Centene Plaza in the Clayton CBD, opened last year to high occupancy.

— Don Weis is a first vice president with the St. Louis office of CB Richard Ellis.

St. Louis Industrial Market

The St. Louis industrial market continues to be a challenge, suffering primarily from a lack of deal velocity and overall volume. While gross absorption is not at its lowest point in recent years, it is still 50 percent under the historic St. Louis average, with most of that activity coming from shorter-term renewals. Net absorption increased only marginally in 2010, but has remained flat for the first half of 2011. As a result, vacancy rates have hovered between 8 to 10 percent in most of the major submarkets for the past 18 months. Unfortunately, the same long-term vacancies have remained on the market for extended periods of time as well. It has not been unusual for some available properties to see their second or third marketing anniversary. Savvy tenants are taking note of this soft market by pursuing “blend and extend” deals with their current landlords.

Walgreens’ regional distribution center (Courtesy of CoStar)

In a blend-and-extend deal, tenants with terms of up to two years remaining approach their landlords offering to blend an early renewal and term extension in exchange for immediate reduction in base rent plus reduced rental structures during the extended terms, or other incentives including needed tenant improvement work. One transaction highlight was Walgreens’ long-term lease of a 500,000-square-foot regional distribution center that included over $10 million invested by the tenant in a high-performance inventory control system.            

The average asking triple-net lease rate has continued to slide, reaching an all-time low of $4.13 per square foot. However, actual deal rates are well below the asking rates due to significant concessions from landlords including extended free rent periods, and higher tenant improvement allowances. Sales have also been very sluggish, due to buyers having difficulty securing acceptable financing and sellers stubbornly clinging to unrealistic expectations of attainable prices. Nevertheless, foreclosures have remained fairly light. This may be due to lenders ongoing reluctance to include additional commercial real estate in their holdings while working to find ways to allow delinquent or slow-paying borrowers to restructure their outstanding balances. We expect to see foreclosures increase substantially if real inflation and interest rates exhibit the upward pressure many fear is looming.

We have reached the 10th consecutive month with no significant construction starts or deliveries. The majority of recent construction projects have been related to the rebuilding efforts after severe storms and tornadoes did significant damage in and around the St. Louis metro area in the first half of 2011, including heavy damage to Lambert-St. Louis International Airport as well as the north and central submarkets.

An aerial image of the Fenton Chrysler plant (Courtesy of Bing)

The Fenton submarket saw significant man-made demolition with the razing of both of the North and South Chrysler manufacturing plants. The demolition removed more than 5.5 million square feet of industrial space, leaving the largest tract of undeveloped land along Interstate 44 that has been seen in years. Potential future uses are varied and include new automotive manufacturers, a retail mega-mall, a sports stadium, or a more traditional mixed-use development. A final plan or developer has yet to be identified. St. Louis’ overall activity level has been better in 2011 than in 2010 and the latter half of 2009, but it still has a long way to go to get back to healthy levels with rising rental rates and sales prices.

— David Zeigler is the managing principal for Lee & Associates of St. Louis.

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