CITY HIGHLIGHT, NOVEMBER 2004

ST. LOUIS SEES IMPROVEMENT IN ALL SECTORS
David Zeigler, Robert Kahn, Jim Sansone

An improving economy has spurred new development and positive absorption across all sectors in St. Louis. In the industrial market, the continued growth of the 2,700-acre Gateway Commerce Center is driving development in the Illinois-Metro East area. The office market is currently experiencing the first positive absorption of office space since 2001, and new medical building construction is on the rise as doctors move their offices from hospitals to freestanding structures. Tax incentives, such as historic tax credits, are creating many downtown projects for multifamily developers, and retail activity is heating up St. Louis.

Industrial

The St. Louis industrial market continues to trend lower and beat the national vacancy averages. The vacancy rate is 7.7 percent in the St. Louis industrial market, which consists of more than 5,100 buildings totaling 246 million square feet. Most of the recent activity has been in the leasing and sales of large blocks of bulk warehouse space, including 498,000 square feet to Procter & Gamble; 402,000 square feet and 240,000 square feet to AWI Warehousing; 420,000 square feet to Deals Under A Dollar; 188,000 square feet to Cott Beverage; and 166,000 square feet to American TV and Appliance. Although lease rates have stabilized in the St. Louis market, they remain 15 percent to 20 percent off of their all-time highs of the late 1990s. However, sales of industrial properties to users and investors continue to bring in record prices as demand continues to heavily outweigh supply.

By far, the most compelling area of development in St. Louis is the Illinois-Metro East area with the continued growth of the Gateway Commerce Center as a player in the regional distribution arena. Gateway is a 2,700-acre park at the intersection of Interstate 270 and Interstate 255. This park offers excellent interstate access, a 10-year tax abatement program, and many other local and state incentives to induce companies to locate in the St. Louis area.

Although speculative development has been dormant in St. Louis for the last 3 years, 6.2 million square feet was developed in the Metro East during this period with an average building size of 660,000 square feet. Hershey was the latest to join Gateway with the completion of a 1.1 million-square-foot facility in May. Unilever occupied a 1.26 million-square-foot building last year and Procter & Gamble moved into an 806,000-square-foot facility. Dial, the first user in Gateway, recently renewed its 812,000-square-foot lease.

This success has prompted the first speculative development of bulk warehouse in St. Louis in 3 years, with two 500,000-square-foot facilities currently under construction. Enterprise zone land surrounding Gateway Commerce Park, including the Lakeview Commerce Park and several parcels owned by independent owners, is now being eyed by other national developers with rumors of two additional 500,000- to 600,000-square-foot facilities planned for the near future.

The St. Louis MSA offers regional distributors the second lowest cumulative travel mileage of the nation’s 62 largest cities and ranks among the nation’s top 10 distribution markets. In a recent study evaluating various distribution chain network configurations by a leading logistics consulting firm, the St. Onge Company concluded that St. Louis was cost-equal to Chicago, Indianapolis and Memphis and was equal or superior in transit time to key destinations throughout the United States.

St. Louis expects to continue to grow in recognition as a superior regional distribution location with greater reach, superior transportation infrastructure, and economic incentives to attract users.

— David Zeigler is a managing principal with Lee & Associates of St.Louis.

Multifamily

Tax incentives, job growth and changing demographics are key factors in accelerating development of the apartment sector in St. Louis. For example, historic tax credits have fueled many of the downtown projects. Also, numerous tax credit programs offered at federal and state levels provide excellent incentives for developers.

For example, the vintage 1920s, 16-story Paul Brown Building, located at 818 Olive Street in the old post office district, is nearing completion. Pyramid Construction, the developer, received support for this $50 million renovation through historic tax credits, low-income housing credits and TIF financing. The building will offer 222 loft-style apartments ranging in size from 588 to 1,741 square feet. Rents will start at $615 and reach $1,650. Besides the many amenities, parking will be available for 130 cars.

An improved job market has moved the unemployment rate below 6 percent in Missouri. This is due to high profile projects such as the new Cardinals stadium, and a higher concentration of jobs in the fields of computer systems analyses, hardware engineering and industrial chemicals.

Demographics in St. Louis continue to change with a decline in the younger adult population, which is the largest group for apartment living. However, baby boomers are moving towards apartments, as they seek out amenities that remove the many responsibilities of homeownership.

All of these elements have created fertile ground for apartment development in St. Louis. Many of the downtown structures built at the turn of the century are vacant but are considered diamonds in the rough. Many have features such as unique architecture, high ceilings, exposed columns and numerous other structure details that add to an appealing living environment.

The Merchandise Mart, built in 1888, is a historic icon on Washington Avenue. Massive blocks of granite and terracotta detailing gave this building a commanding position on the street. HRI Properties renovated this historic structure into 213 loft apartments ranging in size from 630 to 2,000 square feet. Amenities include maple floors, 20-foot ceilings, granite countertops and high-speed Internet access. Numerous floor plans are offered with rents ranging from $630 to $2,000.

One of the newer apartment projects in the popular Central West End is the Metro Lofts. Conrad Properties developed this $32 million apartment community, which features three five-story buildings consisting of 213 one- and two-bedroom, loft-style apartments. The units range in size from 750 to 1,200 square feet, and are renting for $1,200 to $1,800. Open floor plans, high ceilings and exposed concrete columns are just some of the central features that make this a unique property.

Cupples Station, a high-profile, turn-of-the-century complex consisting of 10 warehouses, is considered to be a catalyst for downtown construction. The project is ideally located on 12 acres bound by Clark, Seventh and 11th streets. Currently, HRI Properties is working on a $43 million deal to renovate two of these buildings into apartments. Several other developers are eagerly pursuing Bank of America, the complex’s owner, for the rights to develop in Cupples Station. The value of the Cupples Station complex will exceed $400 million.

According to the Census Bureau, the number of construction permits issued for units nationally between 2003 and 2004 increased by 3.2 percent. St. Louis issued 26 percent more permits during the same time frame, with projections for 2004 to be more than 70 percent.

St. Louis continues to see economic fundamentals improve, which makes it one of the top 20 cities in the nation.

— Robert Kahn is director of operations and a broker with St. Louis-based Realty Exchange, a multifamily and commercial real estate company.

Office

An improving economy is having a positive impact on the office market in St. Louis, causing the first positive absorption of office space since 2001. The improving job market should continue to have a positive impact on office absorption. Many people who were laid off during the recession have begun leasing office space to start their own small businesses.

The recent trend of doctors moving from hospitals to freestanding buildings has resulted in the construction of several new medical buildings, as well as the conversion of some general office buildings to medical space.

In Clayton, developers are seeking large tenants before beginning construction of three office buildings planned at more than 950,000 square feet.

This year, the 25,000-square-foot Des Peres Office Center II was completed, and a 31,000-square-foot building at Lakeside Crossing was completed for State Farm. The Meridian is a 70,000-square-foot building under construction in Clayton. In the Earth City Business Park, Bryman College’s 40,000-square-foot building is scheduled for completion by early 2005. Currently, there are 13 smaller buildings throughout the metropolitan area that are under construction and will total more than 340,000 square feet when complete.

McEagle Development plans to begin construction on the $12 million Sunset Place office and retail development in South County, which has one of the lowest vacancy rates in the market.

Downtown St. Louis has experienced a slight decrease in vacancy rates for the first time in several years, and there is significant development activity planned for the downtown market. The DESCO Group and DFC Group are redeveloping the Old Post Office, which many consider to be critical to the revitalization of the area. The project includes the renovation of the 242,000-square-foot building, and the Century Building will be demolished and replaced with a parking garage.

Several developers are pitching proposals for the dilapidated Cupples Station buildings downtown. HRI Properties is working on a $43 million deal to renovate two buildings in the historic warehouse complex. McCormick Barron is interested in redeveloping one of the buildings into office space.

The lack of new construction and positive absorption in 2004 has improved occupancy rates in the St. Louis office market, and suburban office vacancy rates have decreased slightly to approximately 15 percent. After an abundance of building in the Clayton area in 2001, absorption has brought vacancy rates to about 9 percent in this submarket. There has been increased leasing activity in this market in 2004. The West County submarket has had the most positive absorption this year, but it also has the highest vacancy rate. Construction has exceeded absorption in the St. Charles County submarket for several years and vacancy has increased slightly this year. While overall absorption is increasing, the market has not improved enough to raise rental rates, which are expected to remain steady for a while.

— St. Louis-based NAI DESCO Commercial.

Retail

Activity has picked up in the St. Louis retail market, with major developments and redevelopments prominent throughout the metropolitan region. One notable trend found in the inner regions of the area is the redevelopment of blighted centers. In outlying areas, there is a growing trend of New Urbanism. This New Urbanism is not just being incorporated into new developments but into redevelopment areas as well.

Key examples of inner-region redevelopment growth are in the North County area. The recent opening of Sansone Group’s Shoppes at Cross Keys, a 360,000-square-foot open-air center in Florissant, Missouri, included a complete tear-down of an existing blighted mall as well as new construction. This project involved keeping two existing anchor tenants in operation while building their new locations. The Home Depot joined the existing anchor tenants — a Schnucks Supermarket and Marshalls — and other national retailers new to the area, including Pier 1 Imports, Barnes & Noble, PetsMart, Qdoba Mexican Grill, Cold Stone Creamery, Chili’s and O’Charley’s.

Other areas of retail growth include the ongoing westward expansion from Chesterfield to Wentzville. The majority of development is taking place in these two markets, though growth is strong throughout the metropolitan area and St. Charles County. Part of the reason for the retail surge in these two submarkets is because of the influx of residential development. Tremendous residential growth in the western sector has brought a need for new retailers in the St. Charles, Wentzville and Lake St. Louis areas west of Chesterfield.

This increase in residential growth is partly due to the job market growth, which is finally closing in on the same employment level as at the start of the 2001 recession, according to the U.S. Labor Department. St. Louis is ahead of the overall national employment growth and is ranked among the top United States metro areas. During the last year, employment in the St. Louis region has grown by 2.9 percent, nearly double the nation’s growth rate.

The retail trend throughout the metropolitan area suggests that St. Louis residents are looking for mixed-use and cultural experiences. Popularity in the new urban-style centers support sthe need for quaint cafés, coffee shops and boutiques in a pedestrian-friendly, town square atmosphere, while other mixed-use and big box centers are drawing diverse retail, including stores new to St. Louis like Trader Joe’s and other specialty and internationally flavored stores. The introduction of Nordstrom and Galyans Trading Company into the redeveloped Westfield Shoppingtown in West St. Louis county 2 years ago has sparked new interest — causing typically non-Midwest retailers to take another look at the area.

— Jim Sansone is a principal of St. Louis-based Sansone Group.



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