HEARTLAND SNAPSHOT, JANUARY 2009

St. Louis Industrial Market

Although there are significant bright spots in the St. Louis industrial sector, the general downturn in the marketplace has led to some serious consolidations and a general decline in new construction in the area. The shutting down of many auto factories and consolidation of its related industries has created a market poised for change.

“Our marketplace has historically [had] one of the lowest [vacancy rates] in the country,” explains Sheldon Johnson, executive vice president of St. Louis-based Johnson Group. “Even with all of the bulk space that has been built in the northwest submarket and in Illinois, we have still stayed probably in the top 10 in terms of vacancy rates.”

With all of the consolidation occurring, Johnson estimates that 1 million square feet to 1.5 million square feet will be coming
back onto the market in the near future. Nevertheless, with various Midwest industrial markets catching up in terms of vacancy, St. Louis is bound to see some pricing adjustments on building values, which will create areas of opportunity for both tenants and buyers. For example, Chrysler’s shutting down of 1.5 lines in the Southwest submarket of Fenton, Missouri, has potential to send the area’s historically tightest sector reeling.

Because suppliers of Chrysler were required to be within a certain radius of the plant in Fenton, the area’s vacancy rate used to fluctuate between 1 percent to 3 percent, with unusually high sales-per-square-foot values at $90 per square foot to $125 per square foot, according to Johnson. Although the area will remain a premium to the rest of the market despite the recent closings, buildings in the area will be forced to come down in value.

“I think you are going to see some reductions of 10 percent to 15 percent in value of some of the 10,000-square-foot to 40,000-square-foot facilities, which is going to create opportunities for tenants to take on ownership if they are strong companies,” Johnson says. “That in-turn is going to create further vacancy in older structures, which is going to create opportunities for firms to maybe relocate out of Class C buildings to Class B buildings.”

Another trend expected to have a significant impact on the market in the near future is the present emphasis on short-term leases. Such a plethora of short-term leases being executed around the same time is expected to lead to many tenants having leases expire around the same time.

“They are all going to be jammed kind of in the same time-frame and when the national economy picks up, you will have a lot of tenants all with their leases expiring at the same time,” Johnson says. “No one knows when that date will be, but when that happens, it is going to create a velocity of transactions. My suspicion is it will probably be the third or fourth quarter of 2009 or early 2010.”

As far as new construction, in most instances, if work has not already begun, it is not likely to get underway in 2009. The tightening of the financial market has left many industrial developers with deals in the pipeline unwilling and/or unable to move forward.

“You are going to see no spec development in 2009,” Johnson says. “I have talked to several of the developers both national and local, and if it has not already been started a few months ago, it is not going to happen.”

Regardless of the ‘bigger picture’ issues affecting the area, some significant projects are continuing to move forward with construction.  An approximately 85,000-square-foot build-to-suit deal is scheduled to break ground at Park 370in Hazelwood, Missouri. Additionally, Panattoni Development Company recently purchased a vacant Ford plant in the Hazelwood area. Although building has been delayed, the company is fervently demolishing the multi-million-square-foot auto plant, which is situated on approximately 125 acres, according to Johnson. This new construction is indicative of a trend away from westward growth — in areas such as St. Charles County — and back towards the Hazelwood area.

“What is kind of exciting is that there are a lot of new sites in the central core that are going to open up,” Johnson explains. “There will be some great opportunities there over the next 2 to 3 years, probably to the detriment of the far west like St. Charles County and maybe even [indicating] a pull-back from Illinois”

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