CITY HIGHLIGHT, NOVEMBER 2006

ST. LOUIS CITY HIGHLIGHTS
Scott Bazoian, Jim Mosby, Carrie Pechloff, Jeff Hawley, Jeff Eisenhart, Casey Urkevich, David Wright and Robert Kahn

St. Louis Retail Market

Overall, the St. Louis retail real estate market has remained strong over the course of 2006. Development continues at a strong pace, particularly in the suburban fringe areas.   Banks and restaurant operators are extremely active, with chains such as Pei Wei Asian Diner, Chipotle, Indigo Joe’s Sports Pub & Restaurant, Hooters, Fadò Irish Pub, Houlihan’s and others actively expanding their presence in the St. Louis market.

A potential soft spot in the region is the Manchester Road corridor, where a large amount of vacancy exists and a high degree of retail turnover is being experienced. A potential cause of this is Chesterfield Commons, reported to be the largest open-air shopping center in the United States at 1.2 million square feet and expanding. Many retailers have relocated to this center from the Manchester Road corridor. Moreover, many shoppers have avoided the Manchester Road corridor, opting instead for the shopping experience created by developer THF Realty at Chesterfield Commons.

St. Charles County has remained a strong spot in terms of retail development and population growth, as it is one of the fastest growing counties in the state of Missouri. Many developments that, until 2006, were only in the planning or construction phase have now opened. One such project is Opus’ Dardenne Town Center in the city of Dardenne Prairie, which is anchored by Target, JC Penney, Shop N Save Grocery and Wehrenberg Theatres. Across Highway 40 from Dardenne Town Center is Retail Realty Group’s Shoppes at Hawks Ridge, a Wal-Mart Supercenter and Lowe’s Home Improvement Warehouse-anchored development with numerous retail strip center outlots and freestanding restaurants included. Many of the retailers and restaurants in this development are now open. In the suburb of Wentzville, Missouri, at Interstate 70 and Wentzville Parkway, the Wentzville Commons shopping center has expanded and added a Kohl’s and additional shops and outparcels. The Wal-Mart in the initial phase of this center is being expanded and upgraded to become a supercenter with a full grocery component. This should bring heated grocery competition to the Wentzville submarket, with new Dierberg’s Grocery and Schnuck’s stores located across the street from the Wal-Mart.

Development in Illinois on the eastern edge of the St. Louis metropolitan area continues as well. In Edwardsville, a new 50-acre development located on Highway 159 opened recently and is anchored by a new Dierberg’s Grocery. The Highway 159 corridor is almost fully developed. This fact, along with a new five-lane road surface that is now being completed, should allow for heightened and accelerated development of retail space along Edwardsville’s Highway 157 corridor. Kaplan Real Estate is developing a strip center at Highway 157 and Meridian Road that is currently in the lease-up phase. Further to the south in Illinois, suburbs such as O’Fallon, Shiloh, Fairview Heights and Belleville continue to experience rapid retail growth as well. Retailers that have located in this area are reported to be doing extremely well. 

— David Wright is president of Kaplan Real Estate Co., a full-service real estate firm in St. Louis.

RETAIL DEVELOPMENT HEATS UP IN ST. LOUIS

The St. Louis suburban retail market continues with strong development activity, particularly in O’Fallon, Dardenne Prairie and Wentzville in St. Charles County, Missouri. Within the past year, developers have also made efforts to revitalize the urban areas throughout the city of St. Louis, including the Central West End, the Loft District, the Grove in Forest Park East, downtown St. Louis, and in the future, Ballpark Village and the Bottle District.

Throughout the metropolitan area, lifestyle centers are being developed. This is affirmation that customers prefer the open shopping experience, with sidewalks, storefronts and restaurants with parking nearby, to the enclosed indoor malls. This trend is consistent with what is happening throughout the country. 

The largest of these developments is the Boulevard, an expansive mixed-use residential/retail project located in Richmond Heights across from the St. Louis Galleria. In addition to Crate & Barrel, the first phase of retail includes Ann Taylor Loft, Maggiano’s Little Italy, Kuhlman’s, Bombay Kids, Omaha Steaks and Strasburg Children. Construction of Phase II will soon begin, adding another 125,000 square feet of retail space that will include McCormick and Schmick’s national seafood restaurant.

Retailers that are expanding include Dick’s Sporting and Clothing Goods, which has made an entry into the marketplace by purchasing Gaylan’s Trading Company. OfficeMax is opening a smaller store concept, although the retailer has cut back on its original expansion plans. Shop N Save and Save A Lot grocers continue to expand. Trader Joe’s has opened in Brentwood, Creve Coeur, Chesterfield and Des Peres. The upscale grocer has a devoted following, with customers standing in line in anticipation of the opening day. FedEx/Kinko’s is opening multiple locations in the St. Louis metro area; First Watch is opening more sites; and Starbuck’s planned expansion is making St. Louis the coffee retailer’s fastest-growing domestic market. Bar Louie, originally from Chicago, is opening locations throughout the metro area. It is an upbeat bar consistent with the urban atmosphere of its locations. The Incredible Pizza Company is adding a 60,000-square-foot entertainment center in the South St. Louis County submarket. P.F. Chang’s China Bistro and The Cheesecake Factory have each opened second locations in St. Louis; US Toy Company, a 20,000-square-foot retailer is coming to St. Louis from Kansas City; and several small, upscale clothing boutiques have opened, such as Girl, Jule, Wish, J. McLaughlin, Flirt and Byrd. Walgreen’s continues to reposition itself with the development of freestanding stores featuring drive-thru lanes. On the other hand, Ultimate Electronics and T.J. Maxx have closed various sites, and Burlington Coat Factory and Best Buy are considering doing the same. DeBasio Furniture Store is closing after more than 30 years of business in St. Louis.          

The former CitiMortgage Headquarters in Chesterfield is being redeveloped as a retail complex with restaurants, banks and a new 40,000-square-foot Straub’s upscale grocery store. Jamestown Shopping Center, a 1 million-square-foot mall in Florissant, is reinventing itself through the development of outparcels and freestanding retail space, as well as medical office facilities. 

The retailers that are making deals are asking for higher tenant improvement allowances and other incentives.  Retail occupancy levels are typically as high as 90 to 95 percent throughout St. Louis County, while occupancy levels are as low as 83 percent in St. Charles County, with vacancy and rental rates varying by submarket and product type. The good news is that the retail sector continues to grow throughout the metropolitan area of St. Louis.

— Patty Kueneke is vice president of retail brokerage with Solon Gershman Inc., a leading shopping center developer in St. Louis.

St. Louis Industrial Market

The St. Louis industrial market continues its torrid pace and rapid rise as a regional distribution hub. After posting record-breaking absorption in 2004 and 2005 — 3.8 million and 4.0 million square feet respectively — activity this year may shatter those records. In the first 6 months of the year, approximately 3 million square feet of industrial space was absorbed. Also by midyear, there were 23 new industrial buildings developed, along with expansions at three buildings. Much of the nearly 3 million square feet of new space has already been leased or occupied by its owners.

Developers are decidedly bullish on future prospects, with approximately 1.2 million square feet expected to be delivered by year’s end. In 2007, another 1.4 million square feet of industrial space is scheduled for completion, with most of this space speculative.

Panattoni has completed the 605,000-square-foot Lakeview Distribution Center I in Illinois just across the Missouri border from St. Louis.

Major developments were concentrated in the North St. Louis County (North County) and Illinois submarkets. The largest completed project is Panattoni’s 605,000-square-foot Lakeview Distribution I in Illinois. Started as a spec development, Spectrum Brands leased the building before it was completed. Also on the east side of the river, Lanter III added 400,000 square feet to its bulk distribution center in the Gateway Commerce Center. In North County, JB Management completed its 495,000-square-foot Northside Distribution Center 1, with 40 percent leased to Trane/American Standard.

Just a few years ago, commercial real estate brokers and insiders were flabbergasted when Whirlpool built a 500,000-square-foot building. Today, though, modern spec buildings typically start at that size and go higher.

Much of this movement can be attributed to Gateway Commerce Center in Illinois. Since its start in 1998, more than 6.6 million square feet of space has been built there, including large distribution centers for Hershey Foods, Procter & Gamble, Unilever, Dial, Lanter and Buske Lines. Just minutes from the St. Louis Arch, Gateway Commerce Center has established a base for regional distribution centers and logistic services. And there’s still room for the development to grow.

Sacramento-based developer Panattoni Development Co. is further building on the success of the Illinois submarket, which offers generous tax incentives and affordable land. It recently broke ground on its second building in Lakeview Commerce Center, which sits near Gateway. The 540,000-square-foot facility, which will be completed at the end of the year, is expandable to more than 1 million square feet. Panattoni plans to invest $250 million in 10 buildings that will offer 6.4 million square feet of distribution space when the park is finished.

To the west, St. Charles County offers one of the few areas with vacant land. Additionally, this submarket has the newest stock of industrial buildings in the St. Louis area west of the Mississippi River. The amount of bulk space in St. Charles County has doubled in the past 10 years.

The North County submarket holds promise, since it is strategically located near Lambert International Airport. Plans are emerging to build business parks on land that was vacated when the airport bought out several sites to make way for a major expansion.

All of the area’s submarkets have benefited from the industrial market’s strength with positive absorption across the bar during the first half of 2006. The vacancy rate for all industrial product has remained at 5.4 percent. By product type, modern bulk space showed a slight increase in vacancy because of new construction, but still stands at a meager 3.3 percent. In the office/warehouse sector, new construction also slightly increased the vacancy rate to 5.2 percent. Service center space designed for multiple tenants and typically with at least a third of its space for offices has performed well since 2005, when its vacancy was at 13 percent. By mid-year, the vacancy rate had fallen to just 7.7 percent for service center space.

Rents vary widely by product type and submarket. As an example, average asking rates for Illinois space (primarily modern bulk) are on the low end at $4.87 per square foot; South County (a high concentration of office/warehouse and service center) has the highest average asking rate at $8.01 per square foot.

Moving forward, owners have been able to gradually increase lease rates, but rates will remain stable as new supply competes for tenants. Additionally, the rising cost of capital and construction costs continue to favor leasing over owning.

— The team of Jeff Hawley, vice president; Jeff Eisenhart, associate broker; and Casey Urkevich, associate broker, specialize in industrial sales and leasing in Colliers Turley Martin Tucker’s regional office in St. Louis.

St. Louis Experiencing Spec Industrial Development Boom

The biggest story for the St. Louis industrial market is the amount of speculative development that is currently underway. In the metro east submarket alone, Panattoni is currently developing a 540,000-square-foot modern cross-dock facility in the Lakeview Commerce Park; Trammell Crow/MEPT is under construction on cross-dock facilities measuring 479,000-square-foot and a 579,000-square-foot, respectively; and JB Management is underway on a 156,000-square-foot office/warehouse facility in the Gateway Commerce Park. Balke Brown Associates has announced construction on a 500,000-square-foot facility in the Sauget Business Park.

This area has been growing rapidly, as St. Louis continues to be recognized as a superior location for regional distribution. In total, the submarket has experienced more than 11 million square feet of construction in just the last 5 years, and the new product is 100 percent occupied.

The metro east area is not the only area experiencing an increase in activity. Other submarkets have also seen a spike in recent speculative development. Duke Realty Corporation has announced the redevelopment of the former GM plant in the city of Hazelwood in North St. Louis County (the North County submarket) and will soon begin construction of a new 528,000-square-foot distribution facility. Thackeray Development is a new developer in town and is developing a 216,000-square-foot industrial facility in Park 370 in North County. And Balke-Brown has also begun construction on the Broadway Distribution Center, a 420,000-square-foot distribution facility in the city of St. Louis.

Altogether, there is more than 4 million square feet of speculative construction underway in St. Louis, representing the second highest level of construction in the last 25 years. St. Louis will need to keep attracting the larger regional distribution users to keep this pace of construction going into 2007.

— David Zeigler is managing principal of the St. Louis office of Lee & Associates.

St. Louis Office Market

The St. Louis office market continues to show improvement. Overall, the demand for space continues to be positive, as the market absorbed approximately 800,000 square feet of space during the first half of the year, which set a pace to match the peak years of office absorption in 1999 and 2000. The office market’s rebound has been fueled by the sustained internal growth of small to mid-size companies. Expectations are that the large corporations may soon follow by expanding their workforces.

Active leasing has helped push the area’s overall office vacancy down more than two points from mid-year 2005. With no speculative construction on the horizon, we believe this trend will continue for the foreseeable future. However, the area’s overall vacancy remained in double digits at 13.1 percent at mid-year, which has restricted rental rates, a critical factor necessary to support new construction.

During the first half of the year, seven buildings were delivered totaling 309,000 square feet, but absorption exceeded this new space by nearly a three-to-one margin. A good deal of this new construction was build-to-suit activity, including the 70,000-square-foot First Community Credit Union Building in Chesterfield Valley, located in the West St. Louis County submarket. Additionally, ITT Educational Services moved into its 35,000-square-foot build-to-suit building in North St. Louis County.

Four of the seven other buildings completed during the year’s first half were located in St. Charles County, which continues to emerge as a major office center. With a little more than 131,000 square feet of space, about 40 percent of the space in these new buildings remains to be leased.

The area’s largest office submarket, West St. Louis County continues to post positive growth, as it absorbed 330,000 square feet in the first quarter and another 70,000 square feet in the second quarter of the year. Several large move-ins occurred in West St. Louis County, including Isle of Capri taking 50,000 square feet at Creve Coeur Center III; three tenants, with the largest being TLC Vision Center, moving into 48,000 square feet at the Atrium at Chesterfield; and St. John’s Mercy Health occupying 139,000 square feet of the recently vacated GE Commercial Finance space it leased at Maryville III.

This activity helped push the West County submarket’s vacancy rate down to 13.2 percent at mid-year, well below the 15.4 percent vacancy rate at the start of the year. However, despite the healthy supply of space, large tenants are finding it increasingly difficult to locate large, contiguous blocks of quality space in this popular submarket.

In fact, West St. Louis County started the year with five buildings able to accommodate a tenant in need of 50,000 square feet. By mid-year, only three large block of contiguous space remained. Developers should begin to see opportunities as alternatives for large blocks of space become scarce. Some companies will be forced to choose the build-to-suit route, while developers will find selective opportunities — limited by the availability of quality zoned office sites in this submarket — to build speculative projects.

The Clayton submarket also continues to attract and retain tenants. Serving as St. Louis metro’s second central business district (CBD), Clayton provides tenants with access to the county courts and governmental offices, along with some of the area’s best Class A space in newer buildings. The vacancy rate for the submarket’s Class A space continues to fall, standing at 8.8 percent by mid-year, which is well below the 16 percent high-watermark in 2001, when 800,000 square feet of new space in three new developments came online in Clayton.

The biggest project on Clayton’s drawing board are two buildings for Centenne Corporation, which currently occupies approximately 120,000 square feet in two buildings in Clayton. Phase I calls for a 300,000-square-foot building, with construction to begin next fall and slated for completion in spring 2009. When completed, Centenne is scheduled to occupy roughly half of the space to accommodate its own projected growth.

Large blocks of contiguous space are also scarce in Clayton, with only one opportunity to accommodate a tenant requiring 40,000 square feet or more of contiguous space. That block of 50,000 square feet will be available January 2007 in the Smurfit Stone Center when the company consolidates its office space and expands into 160,000 square feet in the new City Place 6 development in Creve Couer.

Further west, St. Charles County is leading the way in office development for corporate campuses. With large tracts of land available, St. Charles has drawn large build-to-suit projects for MasterCard, CitiMortgage, MCI Worldcom and NISC over the past several years. The lower cost and availability of land, the area’s growing population and aggressive economic incentives have made St. Charles a viable market for new developments.

Additionally, the area’s aging baby boomers continue to fuel demand for healthcare facilities. Significant projects are taking place along the Interstate 40/64 corridor in West County and into the St. Charles market to serve residents in those areas.

The CBD remains a tale of two markets. The downtown area’s top five buildings are nearly filled, with occupancy levels north of 90 percent. Many other properties, though, continue to struggle and fight for tenants.

Investments in the CBD should begin to take hold. The new ballpark opened with great fanfare, and the burgeoning residential population is igniting new retail, restaurants and service businesses. Demand for office space in the downtown area will eventually benefit from downtown’s revitalization.

However, the City Earnings Tax, limited availability of on-site parking and the impact of the scheduled Highway 40 construction project continue to hinder the CBD’s ability to attract suburban tenants to relocate downtown.

— Collier Turley Martin Tucker’s Scott Bazoian, principal and senior vice president; Jim Mosby, principal and vice president; and Carrie Pechloff, associate, are based in St. Louis.

St. Louis Drawing Serious Investor Interest

The Plaza in Clayton

In Clayton, which many refer to as St. Louis’ second central business district, The Plaza in Clayton office building was sold by local developer THF Realty for $93.28 million. California-based KBS REIT acquired the property for approximately $290 per square foot, the highest sales price ever recorded in the St. Louis metro area. Located on the southeastern corner of Hanley Road and Carondelet Boulevard, the 16-story, 307,000-square-foot building is 100 percent occupied, filled by tenants such as Ernst & Young, Metropolitan Life, Northern Trust Co., Husch & Eppenberger LLC, Freedom Development Group and Outsource Technology. THF’s  president Michael Staenberg and COO Marian Nunn worked with Chris Fox, Dennis DeSantis and Joe McGauley of St. Louis-based Gateway Commercial, a member of the Cushman & Wakefield alliance, and Brian Nagel of Cushman & Wakefield in the sales negotiations.

The Pierre Laclede Center in Clayton.

The Pierre Laclede Center comprises the 16-story PLC I and the 24-story PLC II, and is more than 90 percent leased to tenants such as RehabCare Group, which recently renewed its 71,477-square-foot lease. BPG Properties, the real estate investment manager for Berwind Property Group and other major institutional investors, acquired the asset on behalf of BPG Investment Partnership VII, a discretionary private equity fund with total equity commitments of $550 million. The buyer plants to implement a $5 million capital improvement campaign to update the lobbies and common areas, as well as the landscaping and streetscape elements. BPG has retained the property’s existing management and leasing agent, Colliers Turley Martin Tucker.

Development activity is also hot in St. Louis, with THF Realty underway on a significant redevelopment in Bridgeton, just northwest of the city. The developer is in the midst of a $32 million redevelopment that will revitalize and update the existing 325,000-square-foot Hilltop Plaza shopping center, which is located along St. Charles Rock Road just north of Interstate 70. Lowe’s Home Improvement Warehouse will build a new store that will include 117,000 square feet of retail space and a 29,000-square-foot garden center. The existing PetSmart will be razed and a new version of the store will be developed utilizing the brand’s new design format. Both stores are expected to open in the spring. The Sports Authority, Kmart and CompUSA stores will remain in the center, with Sports Authority undergoing an interior remodel, as well as a new entrance and signage. All three will remain open throughout the remodel. The 30-acre site will also undergo upgrades to the parking lot and the landscaping. S.M. Wilson is building the new Lowe’s facility, while Brinkmann Constructors is serving as THF’s general contractor on the center’s renovations and enhancements.

— Kevin Jeselnik

St. Louis Multifamily Market

In a market that is dealing with increased interest rates, as well as an abundance of condominiums and high-priced single-family homes, multifamily real estate continues to provide investment opportunities in St. Louis. Although cap rates are lower than they were in previous years, higher interest rates and large mortgages have resulted in a wider divergence between rents and mortgage payments. This gap reduces the enthusiasm to purchase a new home and makes apartment living more financially appealing. The direct effect of this shift is increased occupancy rates and the opportunity for property owners to elevate rents. Although the multifamily market has been modestly affected, the potential for increased rents will help justify today’s price. The bottom line is that St. Louis continues to offer the astute investor excellent upside opportunities in multifamily real estate.

Our downtown market has received national exposure of late, as more than $4 billion has been invested in its transformation. This includes a facelift on many of the city’s high-profile historic buildings. The downtown renaissance has been fueled by a new ballpark for Major League Baseball’s St. Louis Cardinals, as well as many state and federal incentives. This enthusiasm is contagious, as developers and investors from all over the country are looking towards St. Louis to invest their real estate dollars.

Some examples of the multifamily redevelopment trend include the Bee Hat building located in the center of downtown. This historic 63,000-square-foot building has been converted into 36 loft-style apartments. The Cupples Warehouse, which was built in the early 1900s, was converted into 131 affordable-rate loft apartments and features 1,500 square feet of first-floor retail. The estimated cost of this project is $48 million. The newly renovated Pointe 400 building, formerly known as the PET office building, was originally constructed in 1969. At a cost of $38 million, developer Balke, Brown and Associates has turned this centrally located building into 118 luxury apartments and 7,500 square feet of ground-floor restaurant space.

The surrounding counties have also had their share of multifamily activity. A private partnership headed by Tim Wall has purchased the 612 Raintree Apartments located in North St. Louis County for $23.9 million. In West St. Louis County, Hendrick and Partners brokered the sale of the 532-unit Seven Trails multifamily community for $36.8 million. Also in West St. Louis County, Colliers Turley Martin Tucker recently sold the 280-unit Village Park of Manchester apartments. This facility includes a clubhouse and has been renamed Park Meadows Apartments.

Constantine Benos and Christopher Tucker are both multifamily specialists for Realty Exchange. Regarding the increased interest in St. Louis multifamily, Benos stated, “Investors are expanding their geographic parameters as they seek out opportunities in multifamily real estate that make financial sense. We are still making many deals downtown and in the central corridor. However, we are now expanding our search based on the high demand from out-of-town buyers.”

“Areas such as Pevely and Hillsboro in South Jefferson County are receiving attention, as is North St. Louis,” Tucker adds.

Although we look toward improved financial fundamentals that will support real estate investment over the next 18 to 24 months, we recognize that we will see shifts in both directions for the federal funds rate, unemployment numbers and consumer confidence level. However, St. Louis continues to build a strong foundation to support projected growth and development. Investment real estate is alive and well in the “Show Me State”.

— Robert Kahn is principal and managing director of St. Louis-based Realty Exchange.

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