CITY HIGHLIGHT, NOVEMBER 2005

ST. LOUIS CITY HIGHLIGHTS
David A. Kelpe, Art F. Kerckhoff, D. Sheldon Johnson III, Dennis G. DeSantis, David A. Wright

St. Louis Office Market

If, as the saying goes, “slow but steady wins the race,” then the St. Louis office market continues to plod forward toward the finish line.

During the year's first half, the greater St. Louis area posted a modest positive absorption of 310,000 square feet. While nearly equal to absorption for all of 2004, the first-half figure still stands well below the area's peak office absorption in the late 1990s.

The key difference is employment. Unemployment continues to dip but still the area has 14,000 fewer employed people than at its peak in June 2001.

Despite this, constrained construction, demolition and conversions from office space to other uses have helped the office market regain its pace. Of the eight new buildings that came online during the first 6 months of 2005, half of the 440,000 square feet was build-to-suit and a good portion of the balance was pre-leased. Additionally, the office market continues to burn off sublease space.

In all, the area's vacancy rate took a modest dip, declining from 16 percent at the end of 2004 to 15.8 percent by the mid-point of 2005. Class A vacancy stood at 14.4 percent at mid-year, while Class B was at 18.2 percent.

Still high by historical standards, vacancy rates are making it difficult for landlords to increase rental rates, which range from $17 on the low end in the CBD to as high as $27.50 per square foot in newer suburban buildings. Businesses also are focused on efficiency, doing more with less, including office space, which hinders the ability of landlords to push rental rates in the near term.

In the downtown market, several buildings have been converted to residential use. The movement to loft conversions reduces inventory but takes away from the CBD's employment base. Federated's acquisition of May Department Stores will put further pressure on the CBD since May is a major tenant downtown and Federated plans to consolidate operations to reduce May's employee head count.   Overall, the CBD's vacancy rate fell 0.3 percent to 21.5 percent during the first half of the year.

The suburban markets accounted for nearly all (278,000 square feet) of the positive absorption during the first 6 months. In particular, the Clayton and West St. Louis County submarkets experienced the most absorption, with 68,000 and 132,000 square feet, respectively.

The area's second CBD, Clayton saw its vacancy rate drop a full point to 14.4 percent. That rate takes into account three new buildings that added more than 800,000 square feet to the Clayton submarket over the past 4 years. Renewals led the drop in vacancy. Centenne Corporation, one of the nation's fastest-growing health insurance companies, has given Clayton a boost with plans to redevelop a site for its headquarters. Centenne has proposed two buildings with 560,0000 square feet of space to accommodate its growth. Those buildings will eventually house 1,300 employees.

Two new 60,000-square-foot buildings, Delmar Gardens I and II,   were recently completed in west St. Louis County, the area's largest office submarket.

Further west, the St. Charles County submarket continues its emergence as an office market. Build-to-suits for MasterCard and CitiMortgage over the past few years have added to the submarket's stature. That trend continued with a 135,000-square foot build-to-suit recently completed for NISC. Additionally, a 34,000-square-foot multi-tenant building in 370 Corporate Center II was finished and is ready for lease. Four other buildings comprising 143,000 square feet are under construction and should be ready for tenants by year's end. These new buildings will add to the area's vacancy rate, which stood at 10.2 percent at mid-year.

All in all, the St. Louis market may not be sprinting, but the measured pace of growth shows a sustained recovery in the race to fill office space.

— David A. Kelpe, vice president, and Art F. Kerckhoff, senior associate, work as a team in office leasing and sales in Colliers Turley Martin Tucker's St. Louis office.

St. Louis Industrial Market

The St. Louis industrial market is one of the healthiest in the country with a 6.1 percent overall vacancy rate, which continues to improve. The bulk market is the leading product type with a vacancy of less than 5 percent, followed by traditional office/warehouse space and the service center space, which continues to lag in performance.

The bulk market has seen new construction in three major submarkets: Park 370 in Hazelwood, Earth City in Bridgeton (both in northwest St. Louis County by Highways 270, 370 and 70), and Gateway Commerce Center in Madison County, Illinois.

Duke Realty Corporation is developing a 248,000-square-foot speculative facility at Corporate Trail Distribution Center in St. Louis.

The area rental rates range from $3.35 to $4.50 per square foot triple-net for new bulk inventory. Major lease transactions signed in 2005 include Telcobuy.com's lease of 300,000 square feet; General Motors' lease of 191,000 square feet in Fountain Lakes; Rug Doctor's 125,000-square-foot lease in Fenton; Federal Express' lease of 110,000 square feet in Earth City; and LaGasse Brothers' 100,000-square-foot lease in Dukeport 8. Other leases include DMI's 70,000-square-foot deal in Park 370; Translease lease of 70,000 square feet from ProLogis in Earth City, and Rexel/United lease of 64,000 square feet with Duke Realty in West Port Center I.

The office/warehouse market remained in the 7 percent vacancy range with a continued game of musical chairs among tenants. The buildings with lower ceiling heights and a higher percentage of office space continue to face stiff competition from tenants purchasing buildings or completing build-to-suit transactions. The current trends in the marketplace continue to be larger buildings with 32-foot clear ceiling heights and large trailer courts. Also, investors continue to purchase Class A-leased product quickly when available.

Major purchases include Sacramento, California-based JB Management's purchase of three buildings totaling approximately 1.09 million square feet with cap rates from 8.2 percent to 9 percent. Also, Boston-based TA & Associates purchased a 400,000-square-foot building in Gateway Commerce Center and a local owner sold the 280,000-square-foot Federal Express facility to an undisclosed buyer. User/buyers also kept a quick pace in investment sales led by Aerial Premium Sales' purchase of a 180,000-square-foot building in Overland.

Overall, sale prices continue to trend up, especially on buildings under 50,000 square feet. This is due to the attractive interest rates available to buyers and the shortage of available buildings to be purchased. Summing up the St. Louis market, three things stand out: increased inventory of bulk property which continues to be absorbed; improving market fundamentals with low vacancies; and strong interest from both user/buyers and institutional investors.

— D. Sheldon Johnson, III, CCIM, SIOR, is an executive vice president at St. Louis, Missouri-based Johnson Group Inc./TCN Worldwide.

St. Louis Multifamily Market

The diverse St. Louis economy has historically had a positive impact on its real estate markets, and the 118,000-unit apartment market is widely recognized for its consistency in both supply and demand. The St. Louis apartment market currently enjoys a 91.7 percent occupancy rate, consistent with 2004 but slightly down from 92.6 percent in 2003 and 93.9 percent in 2002.   Many major national and local apartment players are represented in St. Louis, including Mullenix Properties, Gannon, Fogelman, Michelson Organization, Balke Brown & Associates, Berkshire Properties, Equity Residential, Greystar, CMS, CAPREIT, AIMCO, Conrad Properties, Mills Properties, TVO Realty Partners, Camden, RREEF and Sentinel.

In St. Louis County, Pace Properties recently opened The Allegro, a 74-unit apartment development that is part of the company's Boulevard mixed-use community.

Balke Brown & Associates completed The Lofts at the Highlands on the former site of the arena in St. Louis in July 2005.

Monthly rental unit values range from $0.93 to $1.18 per square foot for the loft rehab developments in the city of St. Louis; $1.30 to $1.73 per square foot for new developments in St. Louis City and St. Louis County; and $0.74 to $1.33 per square foot for new developments in St. Charles County.

Sales of apartment buildings have been good over the past few years with cap rates in the 5.5 percent to 7 percent range for new and well-located existing projects and 7 percent to 10 percent for vintage and Class B product. Currently, there are two 1970s-era apartment developments in St. Louis County that are being converted to condominiums. McBride & Sons is converting the 218-unit Greenbriar development in Kirkwood, with units selling in the $109,000 to $199,000 range.   TFN French Quarters LLC is converting 143 out of 502 units in the Town & Four complex in Creve Coeur. The sale prices of these units range from $76,000 to $198,000.

The stability and diversity of the St. Louis market continues to make it attractive to local, regional and national investors.

— Dennis G. DeSantis, SIOR, is senior director at St. Louis-based Gateway Commercial, a member of the Cushman & Wakefield Alliance.

St. Louis Retail Market

The St. Louis retail real estate market has remained strong over the course of 2005. Developments continue at a strong pace, particularly in the suburban fringe areas.

On the western edge of the St. Louis market, suburban St. Charles County has remained a strong area in terms of retail development and population growth with St. Charles County being one of the fastest growing counties in the state of Missouri. Retailers and retail development have continued to march westward in St. Charles County to keep up with and/or stay in front of the population growth. Hot spots in St. Charles County include the Highway 40 corridor. At the Highway 40/Highway N interchange in the suburb of Dardenne Prairie, a new development anchored by a Target, Shop ‘n Save Grocery and multi-screen Wehrenberg Theatre has just broken ground. Less than 1 mile to the west in the suburb of Lake St. Louis, a Wal-Mart Supercenter and Lowe's Home Improvement Warehouse-anchored development is under construction as well.

A few miles to the east, at the Highway 40/Winghaven interchange, the first phase of a lifestyle development known as Caledonia has been completed, with a multi-screen theater now open. In western St. Charles County in the suburb of Wentzville, at Interstate 70 and Wentzville Parkway, the Wentzville Commons shopping center continues to develop and expand with Kohl's, an outparcel development for St. Louis Bread Co., a Bob Evans restaurant and other retailers currently under construction and set to join anchor tenants Wal-Mart and Office Depot. Dierberg's Grocery has also announced that it will build a grocery-anchored center at the I-70/Wentzville Parkway interchange just to the north of an already-opened Schnuck's Grocery and The Home Depot-anchored center.

A potential soft spot in the St. Charles County retail market may be the Highway K corridor in O'Fallon, Missouri. Highway K has had a tremendous amount of unanchored small shop retail development in the past few years and landlords are competing fiercely for tenants to fill available, vacant spaces in this corridor. Existing retail hubs such as the Mid Rivers Mall area in St. Peters, Missouri, remain strong. However, these pockets of retail have gone through a transformation where retailers have relocated in order to stay competitive. One example is a new Kaplan Real Estate endeavor to redevelop an existing site to accommodate Circuit City, which recently relocated to a new prototype freestanding store next to the Mid Rivers Mall in order to better align its store with competitors such as Best Buy.

Development on the eastern edge of the St. Louis metropolitan area in Illinois has taken off at an unprecedented pace as well. In Edwardsville, Illinois, for example, a new 50-acre development located on Highway 159 has recently broken ground. This project is a public/private redevelopment by Capital Land Company of the Madison County Hospital site and will be anchored by a Dierberg's Grocery, Barnes & Noble and others. On the west side of Edwardsville, the Highway 157 corridor is being widened to five lanes, which has spurred additional retail development such as Kaplan Real Estate's new strip center at Highway 157 and Meridian Road currently under development. Further south in suburban Illinois, suburbs such as O'Fallon, Shiloh, Fairview Heights and Belleville continue to experience rapid retail growth as well. This retail growth has followed an anticipated surge in population growth in these suburban areas and based upon current trends, is expected to continue into the future.

— David A. Wright is president of Kaplan Real Estate Company Inc., a St. Louis-based boutique-sized, full-service commercial real estate development and brokerage firm.

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