The St. Louis market, like many across the Midwest, is experiencing a mixture of highs and lows. The retail market is leading the high points, with increased activity — especially in St. Charles County — and many new retailers entering the market. The multifamily market also is performing well with high occupancy rates and high demand from investors to purchase multifamily product. On the down side, the office market is experiencing high vacancy rates and supply that currently exceeds demand. However, there is improvement on the horizon with positive net absorption and a reduction in sublease space. On the industrial side demand is starting to increase due to a limited supply of product.

Retail

Follman Properties • ONCOR International is currently developing Persimmon Pointe Market, a 35,000-square-foot “specialty retail” center in O’Fallon, Missouri.

The St. Louis suburban retail market boasts strong development activity, particularly in St. Charles County, and it welcomes several new retailers to the region including EB Games, Books-A-Million and McAlister’s Deli. St. Charles County has exploded with retail activity following the heels of the office development along the Highway 40 corridor, from Clarkson Road in Chesterfield, Missouri, to Highway N in O’Fallon, Missouri.

The 1,100-acre WingHaven development and new office users like MasterCard International and CitiMortgage now provide lunch traffic to restaurants, and the continued population growth has attracted many new retailers. Two “specialty retail” markets under development in O’Fallon are Persimmon Pointe Market (35,000 square feet), developed by Follman Properties • ONCOR International and Winding Woods Center (31,000 square feet), developed by THF Realty. McAlister’s Deli, EB Games, Cold Stone Creamery and Picasso Coffee will make their debut in these centers.

At Highway N, two power centers are planned on opposite sides of Highway 40/61. Walpert Properties is marketing WestChase Shops (300,000 square feet) to the north and Dardenne Crossroads (275,000 square feet) to the south. THF is also planning more than 1 million square feet of retail space on 260 acres across from the WingHaven development. This project will be similar to the company’s Chesterfield Commons development, which will feature an additional 800,000 square feet of retail space by 2005. A second hot spot for retail, Chesterfield Valley, is home to St. Louis’ first Bentley dealership and the new 88,000-square-foot Chesterfield Towne Centre developed by Gundaker Commercial Group.

The 1.1 million-square-foot upscale outlet center in Hazelwood, Missouri, opens November 13. The new St. Louis Mills development will bring Books-A-Million, Off 5th Saks Fifth Avenue Outlet, Off Broadway Shoes and PBS KIDS Pavilion to the region. Also in North County, several retail sites are undergoing redevelopment including the Shoppes at Cross Keys and Northland Shopping Center, being redeveloped by Sansone Group; River Roads Mall, being redeveloped by Taylor Morley; and Jennings Station Crossing, being redeveloped by RPM Group.

The reopening of Westfield Shoppingtown West County mall, which brought retailers such as Nordstrom, Galyan’s Trading Company, Lladro’s and Coldwater Creek to St. Louis, was somewhat below expectations. Crazy Fish already closed its store there, and competition with the Galleria’s customer base will continue to be a challenge.

Existing retailers expanding in St. Louis include Kohl’s, Circuit City and Ultimate Electronics. Best Buy, also an existing retailer, has plans to open a new store near two competitors in Brentwood. On the other hand, Gordmans has closed some sites, Drug Emporium is leaving the St. Louis market, and nearly half of Kmart’s vacated space still needs to be filled.

New fast-casual restaurants that have entered the St. Louis market are Qdoba, Nothing but Noodles and Roly Poly. In addition to this trend, some local entrepreneurs are now adding coffee shops to their repertory such as Picasso Coffee, which landed at Winding Woods Center. Starbucks Coffee is expanding its presence with freestanding, drive-through facilities. Obee’s Soup, Salad & Subs announced plans to develop 70 sites in the St. Louis area, and Planet Smoothie is recreating its concept to include wraps and salads for a new Planet Smoothie Café. Recent newcomers such as Culver’s, Smokey Bones and P.F. Chang’s China Bistro, also have additional locations planned or under development in the region.

Retail occupancy levels are typically as high as 95 percent to 100 percent in the malls and lifestyle centers with vacancy and rental rates varying by submarket and product type. The good news is that the retail sector continues to grow throughout suburban St. Louis.

— Patty Kueneke is vice president of retail brokerage for Follman Properties • ONCOR International, based in St. Louis.

Multifamily

The St. Louis apartment market is currently experiencing occupancy rates of a little more than 90 percent. Occupancy rates for apartments that cater to middle- and low-income tenants remains at about 95 percent.

Demand from investors to purchase apartment complexes remains high, but there are a relatively small number of complexes being offered in the marketplace. This high demand, coupled with limited supply and low interest rates, continues to drive prices up and lower acceptable cap rates.

The bulk of new apartment development is occurring outside of the city of St. Louis and St. Louis County. Instead, the majority of new and planned developments is occurring in St. Charles County. In 2000, St. Charles County had an existing base of approximately 8,100 apartment units (including only those apartment complexes with 50 or more units). During the past 32 months, considering only apartment complexes with 50 or more units, approximately 2,000 additional units have been added in the county, and another estimated 1,400 units are in the development/planning stage.

The number of residences and businesses continues to grow in St. Charles County. From 1990 to 2000, the population increased more than 33 percent and, by 2010, the population is expected to increase another 13 percent or more. This increase will result in a population of 333,000, which is a long way from its base of 54,000 people in 1960.

O’Fallon, Missouri, which is one of the fastest growing cities in the United States, has also shown the largest growth within the county. As a result, the population projection for 2006 is 80,000 people. This number is up 74 percent from 46,000 people in 2000.

— Norb Lauer is vice president and real estate investment specialist with the brokerage division of St. Louis-based Gundaker Commercial Group.

Office

The suburban St. Louis office market fits the adage of the glass being half full or half empty. Encouraging signs include positive net absorption, growth in certain economic sectors, and a delicate balancing act of slowing office development and a continued reduction in sublease space. But the market is far from being full due to downward pressure on rental rates, supply exceeding demand, less than favorable vacancy rates, underused space and space that soon will be returned to landlords who will need to generate rental income.

The suburban Class A office market recorded 295,000 square feet of positive net absorption through the first half of 2003, a nearly 50 percent increase from the 197,000 square feet of net absorption posted during the same period last year. Growth in the medical and communications sectors led the way in this absorption. Tenants also have benefited from market conditions by trading up to Class A space from Class B space, seizing the opportunity to improve their address while holding, or even lowering, their occupancy costs.

New construction during the first half of 2003 added 451,000 square feet of space to the office inventory, with three-fourths of this space being build-to-suit. Despite such cautious development, far below the levels of previous years, construction exceeded absorption throughout St. Louis. As developers put the brakes on plans, the end result in the suburbs was a wash with Class A vacancy remaining stable at 14.2 percent.

Sublease space decreased by 265,000 square feet by mid-year, leaving 1.1 million square feet of sublease space still on the market. Most of the remaining sublease space will expire in the next 18 to 24 months so landlords will face a challenge next year and into 2005. Further complicating matters, too many landlords chasing too few tenants through mid-year 2003 continued the downward pressure on rental rates with a slight uptick in tenant improvement allowances and free rent concessions.

Economic conditions dictate the tenuous balance in the St. Louis suburban office market. The state of Missouri estimates that the St. Louis area lost more than 9,000 jobs during 2001-2002. That job loss equals out to about 2 million square feet of vacated office space — assuming that each worker occupied an estimated 225 square feet of space. Many companies also have shadow space, which is underused space that is a result of downsizing. This space is not reflected in vacancy rates, but it will be filled first if, or when, companies boost their work force.

West St. Louis County remains the address of choice. As the area’s largest office market, the area had positive absorption of 129,000 square feet in Class A buildings. However, many tenants moved out of Class B buildings, which led to 135,000 square feet of negative absorption by mid-year.

With nearly 18 million square feet of inventory, West St. Louis County faces a challenging market. Its vacancy rate stands at 16.4 percent, a condition borne from rapid development during the 1990s and into the early part of the 21st century. Many of the businesses that fueled this growth — 5 million square feet of new space during the last 12 years — faltered when the economy sputtered.

Farther west, the St. Charles County submarket continues to lead the suburban market in new development. For example, CitiMortgage will occupy its 570,000-square-foot headquarters by year’s end. The company follows MasterCard and MCI in the move west across the river. These large, build-to-suits account for a majority of the area’s office occupancy growth while smaller, speculative buildings built during the past 2.5 years search for tenants. Overall, the latter buildings primarily account for the area’s 17.1 percent Class A vacancy rate.

The Clayton market, the area’s second central business district, continues to wrestle with a wealth of new construction brought online in 2001 when the market added 800,000 square feet of new space. Before this new construction, Clayton’s vacancy rate stood at 2.9 percent. Today, the vacancy rate stands at 14.8 percent for both Class A and Class B buildings.

Despite this high vacancy rate, developers remain optimistic about Clayton’s future. THF Realty plans to build two office buildings and a parking garage across from The Plaza in Clayton, which it opened 2 years ago. If prospective tenants pull the trigger, THF will begin construction next April on the first 18-story building with expected completion in April 2006. The net result would be nearly 310,000 square feet of new office space.

The second 18-story office tower would include 257,000 square feet of office space and 16,000 square feet of retail space with plans to open in late 2008 and early 2009. These new buildings would be connected to a parking garage with 730 spaces.

Clayton also has drawn the interest of Summit Development Group, which is planning a 400,000-square-foot office building with retail space at street level and a 225-unit hotel. With an expected cost of $120 million, Summit will not begin construction until the office building is 35 percent pre-leased.

The negative factors in the suburban office market may leave many thirsty, but there is enough water in the glass to keep their throats moist. The level of optimism will rise when economic conditions give companies the push they need to put workers behind desks.

— Scott Bazoian is senior vice president of the office division for Colliers Turley Martin Tucker’s St. Louis office.

Industrial

The industrial market in St. Louis is showing positive signs. After battling a sluggish economy, some positive absorption occurred during the second quarter of 2003. Due to a limited supply of industrial space between 10,000 square feet and 20,000 square feet, demand is starting to increase.

Vacancy rates for the overall market are estimated at 10.5 percent in the metropolitan area, with rates ranging from 3.5 percent in the metro east area to 25 percent in Chesterfield Valley. Rental rates have decreased with the down economy and new product coming online. Rental rates range from $2.50 per square foot in the city of St. Louis for manufacturing space to $10 per square foot for high-tech space in Fenton, Missouri.

While the St. Louis industrial market is seeing signs of improvement, the road to recovery will be gradual. The majority of the new industrial development has been taking place on the Illinois side of the Mississippi River at the Gateway Commerce Center. This trend can be attributed to the availability of accessible land as well as to incentives being offered by the state of Illinois and local governments.

Speculative construction has been decreasing with tenant demand. In Fenton, Summit Development recently developed a 130,000-square-foot speculative building. Matrix Commons is currently developing a 57,600-square-foot speculative building in the area as well. In West Port, Duke Realty has a 38,000-square-foot speculative building under construction at Lakeside Crossing.

Although speculative construction is somewhat limited due to economic conditions, developers continue to construct build-to-suit space. A new 160,000-square-foot facility was recently completed for Federal Express in the Mid County market and another 20,000-square-foot facility was constructed for National Wood Floor in Chesterfield. The 1.26 million-square-foot Unilever Distribution Center and the 650,000-square-foot Lanter III facility are two build-to-suit developments that were recently completed at Gateway Commerce Center in Madison County. In addition, Hershey Foods has a 1.1 million-square-foot building under construction on 90 acres in the same park. By the beginning of 2004, Gateway Commerce Center will have nearly 5 million square feet of industrial space.

While the build-to-suit market continues to move along, it is having a negative effect on existing space. Tenants are moving to new buildings designed for them and leaving vacant space behind. The St. Charles County market will lose more than 400,000 square feet of tenants to the Gateway Commerce Center this year. On a brighter note, several office/warehouse submarkets experienced positive absorption during the first part of 2003.

A new sector of the industrial market is emerging in the St. Louis market with the life science and biotech industry. Several projects are in the planning stages in this new sector, including a 60,000-square-foot development north of the Donald Danforth Plant Science Center being developed by The DESCO Group.

Despite a sluggish economy, it appears that the St. Louis industrial market is leveling off. Developers will continue to lean toward build-to-suit developments until the demand for space increases considerably.

— John Sheahan Jr. is a principal with NAI DESCO Commercial, based in
St. Louis.

©2003 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.