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ST.
LOUIS MARKET REPORT
Keith Zeff
St. Louis is not immune from the nation’s economic slowdown.
The recession primarily impacted the office market as companies
cut employees and began subleasing space. Additionally, most
companies are hesitant in expanding their space. The industrial
sector also has suffered, but more so from aggressive building.
Both slides in the office and industrial markets are beginning
to level off, which is a positive sign that these markets can
weather the storm and are in considerably better shape than
in most major cities.
Retail and multifamily are the silver lining in the clouds.
St. Louis continues to see major national retailers expand to
protect their turf, as several newcomers have either entered
or plan to enter the fray. The area’s constrained supply
is a double-edged sword in the multifamily market. While investors
face limited development, the lack of growth provides high occupancy
rates that guarantee solid returns on their investments for
years to come.
Industrial
The two factors that most injured the St. Louis industrial real
estate market — overbuilding and negative absorption —
have not disappeared in 2002. Fortunately, these negative trends
have lessened. The industrial inventory grew by 3.5 million
square feet in 2001 while absorption was negative 2.7 million
square feet. This combination of factors increased the amount
of vacant space by over 6 million square feet. During the first
half of this year, inventory increased by 1.1 million square
feet and absorption was negative 414,000 square feet, both figures
promisingly below the 2001 pace.
In the overall area, absorption was strongest in North St. Louis
City, with more than 700,000 square feet absorbed. Some of the
tenants occupying large blocks of space included Fresh Warehouse,
Sigma Aldrich, GPX, USF Logistics and Tandem Properties. St.
Charles County recorded more than 100,000 square feet of net
absorption; the largest tenants included Friend Tire, TSI Cabling
and Weidman. Only Fenton approached 100,000 square feet of absorption
among the remaining submarkets.
New construction occurred in North St. Louis City and St. Charles
County, the two areas that experienced occupancy growth, and
also in Chesterfield. None occurred in North County or Mid County,
both traditional industrial areas. North St. Louis construction
included Balke Brown’s St. Louis Commerce Center 2 (337,000
square feet) and Sigma Aldrich’s build-to-suit (130,000
square feet). Five new St. Charles County buildings totaled
264,000 square feet. The largest was a 115,000-square-foot build-to-suit
at Elm Point for Cardinal Distributing. In Chesterfield, two
new speculative service centers by THF Development, Chesterfield
Commons A and B, added 205,000 square feet.
Much of the new construction of the last 2 years has either
been built for specific tenants or has attracted tenants from
existing buildings. It has not been built exclusively to accommodate
new or expanding tenants. This made it more challenging for
existing buildings to compete with new buildings for tenants.
Developers continue building more space even though 16 million
square feet of vacant industrial space remains available. Often
the new space offers operating efficiencies unavailable in older
buildings or even in second-generation space. This trend does
not bode well for the growing supply of vacant space.
Office
For the first time since the recession began, the suburban St.
Louis office market recorded a quarterly net occupancy loss.
The second quarter loss of 153,000 square feet overturned all
except 5,000 square feet of the first quarter’s gain.
The year-to-date loss continues a trend that began last year.
Absorption last year was 735,000 square feet, less than half
of the totals for 2000 and 1999, reflecting losses in metropolitan
area employment. Employment in service-producing industries
in April 2002 was 23,000 below the previous April. Goods-producing
employment, which provides many office jobs in the St. Louis
metropolitan area, was down by 22,000 jobs over the same period.
Completed office construction added 2.6 million square feet
of inventory in 2001, while completed construction through June
of this year totals only 432,000 square feet. Another 410,000
square feet is under construction, most of it built speculatively,
scheduled for completion by year’s end. In addition, 800,000
square feet in two build-to-suit projects, for CitiMortgage
and Magellan, are scheduled for occupancy in 2003. When those
companies vacate their current locations, hundreds of thousands
of square feet of second- and third-generation space will open,
putting pressure on an office market that is competing for a
limited supply of tenants.
Further compounding the over-supplied market is sublease space.
Colliers Turley Martin Tucker currently monitors 1.6 million
square feet of sublease space in the area. Nearly half of that
space is currently occupied. Those tenants will eventually vacate
or downsize, exacerbating the area’s occupancy loss trend.
Sublease space typically leases for 15 to 20 percent less than
space leased directly from the building owner. Rents are likely
to decline even further when the remaining occupied sublease
space is vacated, putting downward pressure on lease rates.
Absorption of office space in West County was negative in the
second quarter of 2002, marking the fourth consecutive negative
quarterly absorption. West County has lost more than 400,000
square feet in occupancy in the four quarters. Hardest hit of
the West County submarkets was Creve Coeur, which accounted
for 275,000 square feet of occupancy loss.
Retail
The bright spot in St. Louis real estate is its strong retail
market. Both Wal-Mart and Sam’s Club added new St. Louis-area
locations in the past year, including Highland, Illinois, and
Kirkwood Commons. Home Depot opened last year in St. Peters,
Wentzville and Ellisville, and a Home Expo store opened in Manchester.
Kmart added a super store in Crestwood and Lowe’s opened
in Ballwin. Value City now has 12 St. Louis-area locations.
Smaller scale discount retailers have added numerous locations
in the last 12 months. The locally based Deal$-Nothing Over
a Dollar added six local stores in 2001, bringing its total
to fifteen. Likewise, Dollar General, Dollar Tree, Family Dollar
and Factory 2-U have all opened additional St. Louis locations.
Both nationally and locally, Walgreens continues to be a dominant
force among drugstore/pharmacies, adding seven new or replacement
locations last year.
Several newcomers have set up shop in St. Louis. Ultimate Electronics
opened four stores, and Costco, HomeGoods, Bang & Olfson,
Stein Mart, Bass Pro Shops, Whole Foods, REI and Orvis all opened
single locations. The latter three of these new retailers made
their appearances at Pace Properties’ redeveloped 200,000-square-foot
Brentwood Town Square, St. Louis’ first lifestyle center,
at Brentwood Boulevard and Highway 40/Interstate 64. Near this
intersection, an 180,000-square-foot shopping center called
Brentwood Pointe opened, which includes a Dierbergs supermarket,
Macaroni Grill, Ultimate Electronics and small-shop space. P.F.
Chang’s, Houston’s and Apple Computer plan to open
locations this year.
Other retail centers either opened or underwent expansions last
year. St. Louis-based Pace Properties’ The Crossings at
Mid Rivers encompasses 250,000 square feet with Costco as an
anchor. Gravois Bluffs, in Fenton, by G.J. Grewe, added 275,000
square feet with Wal-Mart as an anchor; another 75,000 square
feet are planned to open this year. The 155,000-square-foot
St. Louis-based Sansone Group’s Mid Rivers Crossing opened
in St. Peters, Missouri, with Home Depot as an anchor.
September 20 was opening day for the rebuilt and expanded Westfield’s
West County Center, which added a Lord & Taylor and the
area’s first Nordstrom. The revamped center is expected
to draw regional shoppers. The new competition has led to a
flurry of renovations at several other area shopping centers.
Next year may also bring the long-awaited arrival of the area’s
first Crate & Barrel to a planned retail center along Brentwood
Boulevard across from the St. Louis Galleria.
Multifamily
Investors are pouncing on multifamily product. Colliers Turley
Martin Tucker recently received 19 bids from qualified investors
on a multifamily listing. Interest came from a wide spectrum
of investors, including pension fund advisors; private, nationally
based multifamily operators; syndicators; and real estate investment
trusts (REITs).
As a result of this increased demand, capitalization rates for
institutional-quality multifamily product in the St. Louis market
have fallen by approximately 50 to 75 basis points to the high
7 percent to low 8 percent range.
The region’s economic stability is evident in the historical
occupancy of the multifamily market, which has remained in the
low- to mid-90 percent range over the last decade. Even in the
recent economic downturn, occupancies dipped into the low-90
percent range while many other cities saw numbers slide into
the mid- to low-80 percent range.
The market’s constrained supply further attracts investment
capital to multifamily product in St. Louis. Scarce available
land, particularly in St. Louis County, and highly restrictive
zoning have contributed to severely limit new multifamily construction.
The metro area contains approximately 93 municipalities, each
with its own zoning regulations, a major reason why national
home builders have avoided the St. Louis metro area. Highly
restrictive zoning combined with natural geographic boundaries,
including the Mississippi and Missouri rivers to the east, west,
and north, have limited new development particularly in St.
Louis County. As a result only 3,728 units or 6 percent of the
total base have been added in the last decade.
Within the last 3 months, investors, including REITs, pension
fund advisors, syndicators and national owner operators have
committed more than $550 million in capital to acquire multifamily
product in St. Louis. The limited amount of product available
has prevented much of this capital from being placed, creating
an extraordinary opportunity for sellers to maximize value.
Keith Zeff is vice president - research for Colliers Turley
Martin Tucker in St. Louis.
©2002 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints of
this article contact Barbara
Sherer at (630) 554-6054.
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