CITY HIGHLIGHT, NOVEMBER 2008

ST. LOUIS CITY HIGHLIGHTS
Richard Robinson, Henry Voges, Ken Aston and Ed Lampitt

St. Louis Retail Market

The St. Louis retail market continues to hold its ground in a tough economy, with vacancy rates only slightly higher than last year and rental rates trending upwards, albeit slowly. According to figures from Costar, the metro area retail sector recorded an overall vacancy rate of 8.2 percent in the third quarter, which is down from 8.4 percent in the second quarter but up from 7.9 percent at the same time last year.

Average rental rates were quoted at $13.34 per square foot, up three cents from the second quarter and up from $12.79 at the same time last year; this growth is a positive sign for owners and developers, and is proof that, despite a struggling economy, retail space is still in demand.

This year, 16 new retail buildings have been completed, comprising approximately 360,000 square feet of space. The majority of the new development has taken place in the St. Charles County submarket, led by the 212,106-square-foot Meadows at Lake Saint Louis development by Davis Street Land Co., which was completed during the third quarter. The Meadows will become the first Missouri location for Davenport, Iowa-based department store Von Maur when it opens in 2010. The Metro East and West County join St. Charles County as the submarkets with the most activity.

Other big developments that opened this year that are impacting the retail market include: a freestanding Target in Fairview Heights, Illinois; Fountain Plaza in Ellisville, Missouri, anchored by Straub’s and the first St. Louis location for Lifetime Fitness; Arnold Commons, in Arnold, Missouri, anchored by Lowe’s Home Improvement Warehouse and Dierbergs; The Summit at Gravois Bluffs in Fenton, Missouri, anchored by JC Penney; and Town & Country Crossing, featuring Target and Whole Foods Market as anchors.

With more than 150,000 square feet still under construction in the St. Charles submarket, the only submarket with more current construction is West County, where approximately 400,000 square feet in new retail product is being built. Most of West County’s product is contained in the 339,298-square-foot Manchester Highlands project, which is 87 percent pre-leased. The Pace Properties development will be anchored by Costco, Wal-Mart, Best Buy, PetsMart, and Bed Bath & Beyond; its first phase is slated to open this fall.

Also slated to open later this year are the Barnes & Noble expansion of West County Mall and a score of traditional Wal-Mart stores that are being expanded into the SuperCenter format. Projects opening in 2009 and 2010 include Des Peres Corners, anchored by Schnuck’s and opening summer 2009; the Nordstrom expansion at the St. Louis Galleria, opening spring 2010; and Phase II of The Boulevard, which will be anchored by Dick’s Sporting Goods and is opening spring 2010.

The pace of new development in the near future is destined to be a bit slower. The international credit crisis has made it extremely difficult for developers to secure financing, even in some cases for projects with significant anchors. Shopping centers will need to be significantly preleased in order to commence construction. However, the tightened credit situation is not expected to impact those projects already under construction.

— Richard Robinson is a vice president in CB Richard Ellis’ St. Louis office.

St. Louis Office Market

The St. Louis office sector is experiencing many of the same effects of the economic uncertainty affecting the world economy. Corporations are retrenching, developers are struggling with financing, and lease decisions are being put on hold. Yet, in the midst of this challenging period, there are still opportunities in the St. Louis market.

Though the metro area posted positive absorption in all submarkets except the central business district in the third quarter, there are indicators that the office market is slowing. Year-to-date absorption totals 391,000 square feet according to Jones Lang LaSalle’s third quarter office market report. A more telling statistic is the dramatic increase in the amount of sublease space that has entered the market; much of it related to retrenching in the financial services sector. Third quarter sublet absorption dropped over 150 percent, to negative 40,327 square feet. This trend is expected to continue for the balance of the year, creating a new round of shadow space that will put additional downward pressure on rents next year.

Banking and financial services sectors are seeing the greatest volatility. Wachovia is a good example of extreme and rapid change. Less than 6 months ago, Wachovia purchased AG Edwards, a local icon in the investment world. At the time, Wachovia committed to maintaining the 2 million-square-foot corporate headquarters in St. Louis. Now, Wells Fargo is slated to acquire Wachovia and has preliminarily indicated the brokerage headquarters will remain in St. Louis.

As corporations react to the uncertainty in world markets, many lease move or expansion decisions are being put on hold. We have seen a marked increase in short-term renewals and deferrals of expansions. Major employers, such as BlueCross/Blue Shield, have explored real estate options such as build-to-suit development, but the long-term commitments required by developers are diametrically opposed to the short-term flexibility that corporations are looking for to weather the existing economic uncertainty.

Many quality projects that just 3 months ago seemed certain and financially viable are now facing an unprecedented financing market. Owner-occupied projects such as Brown Shoe Company’s 760,000-square-foot office development or Centene’s 560,000-square-foot corporate headquarters — which are both in Clayton, Missouri, the area’s strongest submarket — are delayed. Ballpark Village, a mixed-use project with a significant office component, faces a challenging public sector bond financing.

One result of these stalled projects is to prolong St. Louis’ “law firm shuffle.” There are an unprecedented number of major law firms that are looking at making occupancy decisions as a result of lease expirations and mergers. Firms such as Polsinelli Shalton Flanigan Suelthaus PC, Armstrong Teasdale, Stinson Morrison Hecker, Lewis and Rice, and Husch Blackwell Sanders are all in the market. Combined, their requirements are in excess of 1 million square feet. New developments that are trying to secure a part of this requirement are having difficulty getting their projects built, which is forcing many of these firms to re-examine their options. Thompson Coburn, a law firm in the CBD with a 225,000-square-foot requirement, recently passed on a new development and renewed at US Bank Plaza.

Clearly, existing buildings with well-capitalized owners will be in good shape to weather the expected slowdown in 2009. US Bank Plaza had a competitive advantage — certainty in its ability to deliver, as well as its capacity to provide capital funding for tenant improvements. As corporations retrench and put their space on the sublease market, landlords are in a position to extend lease terms with new tenants that are picking up these sublease bargains.

The office market will be difficult for developers until stability returns to the financing markets. In the near term, this means no increase in supply, which traditionally indicates a period of rising rents. However — and this is a big however — this assumption is based upon steady demand, which appears to be anything but steady in St. Louis. Yet, there is opportunity in uncertainty. Strong and intimate knowledge of specific deals in the market will win the day as we weather these unprecedented times.

— Henry Voges is a senior vice president in the St. Louis office of Jones Lang LaSalle.

St. Louis Multifamily Market

Condominium projects continue to outpace apartment developments, with about 3,700 multifamily for-sale units and 2,200 rental units currently under construction, planned or proposed in the metro St. Louis pipeline. However, the downturn in the for-sale housing market and resulting credit crunch are causing some condo developers to rethink their plans. Earlier this year, The Lawrence Group announced that it was removing the planned condominiums from its Park Pacific project, which is located at 13th and Olive streets in downtown St. Louis, instead increasing the number of apartments from 57 to 193 units. Another downtown project, the 166-unit SkyHouse condo tower, was cancelled altogether.

Mixed-use projects are also growing in popularity throughout St. Louis, from downtown to the suburbs. The $450 million Mercantile Exchange project will entail the redevelopment of the former St. Louis Centre mall and several other downtown buildings into 525,000 square feet of office space, 450,000 square feet of retail, a 216-room hotel and hundreds of residential units. Following the demise of its partner, Pyramid Construction, earlier this year, Spinnaker Construction will continue moving forward with the project.

Among the developers entering the market recently is Dallas-based Hepfner, Smith Airhart & Day. HSA&D is developing 3949 Lindell–Station G at Forest Park Southeast, a 197-unit luxury apartment community that will feature 14,000 square feet of retail space.

Minneapolis-based OPUS Northwest has successfully developed the $50 million Park East Tower in the Central West End, at the corner of Euclid and Laclede avenues, and is now developing the $20 million, 48-unit Park East Lofts condominium project next door.

American Apartment Communities is currently building a new 323-unit townhome community in Fenton. The construction cost for the project, which has been named Gravois Ridge, is estimated at $40 million.

There are four significant multifamily developments that are garnering a lot of attention in metro St. Louis.

• Ballpark Village: The Cordish Company recently began site work on this long-awaited $600 million project north of Busch Stadium, which will include up to 360,000 square feet of retail and 750,000 square feet of office space, as well as a hotel.

• Lemp Brewery: Garrison Development is working on a $150 million redevelopment of this former brewery complex in southern St. Louis. Plans call for approximately 400 apartments and 56,000 square feet of commercial space to be built in phases through 2012.

• New Town at St. Charles: Work continues on this $1.5 billion New Urbanism project by Whittaker Builders, located north of Highway 370. At build-out, the site will include 5,700 housing units, along with commercial space and community services.

• Sunnen Products: This locally-based firm is seeking a joint venture partner for a $500 million mixed-use project in Maplewood, near Hanley and Manchester roads. Preliminary plans call for 300,000 square feet of retail space, 600,000 square feet of office space, 1,300 housing units and a 160-room hotel. This transit-oriented development will be anchored by two existing MetroLink rail stations at its northern and southern ends.

The submarket seeing the largest volume of new multifamily construction is the in-town area north of Interstate 64, which includes downtown St. Louis. Approximately 2,300 condos and apartments are underway, planned or proposed in this area, which is indicative of the success of the city’s downtown revitalization efforts. In addition, strong population and economic growth have driven developer interest in St. Charles County, where approximately 1,200 multifamily units are in the works.

While downtown St. Louis and St. Charles County will remain popular with developers, the North of Interstate 44/Mid-County submarket is becoming a growth center. Approximately 1,000 multifamily units (including condos) are slated for development in this area, which includes the city of Clayton, where approximately $1 billion in new commercial development is planned or underway.

Year-to-year apartment rent increases have been hovering in the 2 percent range for the past several quarters. For the fiscal year that ended in June, the average apartment rental rates increased 2.4 percent, from $712 to $729. Submarket performance ranged from a slight decline, 0.7 percent in St. Charles County, to a gain of 4.5 percent in the Bridgeton/Northwest County submarket over this period.

Reflecting increased demand and limited new apartment completions, the overall average apartment vacancy rate measured 6.7 percent in the second quarter, the lowest second-quarter rate in 5 years. Forecasted vacancy in 2009 is expected to decrease below 5 percent.

— Ken Aston is a partner in the St. Louis office of Hendricks & Partners.

St. Louis Industrial Market

The St. Louis industrial sector may end up showing a tale of two halves this year. Certainly, the first half of the year showcased the area’s stability, with positive absorption of 1.5 million square feet of industrial product. Much of that occurred in the first quarter when the area saw positive absorption of 950,000 square feet. Signs of a pull-back surfaced after mid-year; net absorption in the third quarter dipped to 200,000 square feet.

Most noticeably, the St. Louis metro area was hit hard when Chrysler idled two area plants. The company’s South Plant, which produced minivans, was idled indefinitely, while activity at the adjacent North Plant, which builds trucks, was reduced from two shifts to one. Chrysler’s decision quickly rippled over to parts suppliers, with Lear Corp. and Findlay Industries announcing plans to shutter their St. Louis operations.

Two significant deals played a major role in the year’s first half. Procter & Gamble consolidated operations in Gateway Commerce Center, leasing 1.2 million square feet. The consumer products giant moved into the 580,000-square-foot Westway III, which will be expanded by year’s end. And Ozburn-Hessey Logistics leased 540,000 square feet in the Lakeview Distribution Center. Ozburn-Hessey originally purchased the building from Panattoni in January, subsequently negotiating a sale/leaseback transaction with a REIT affiliated with USAA Real Estate Company.

Additionally, World Wide Technologies will take all 700,000 square feet in Lakeview Commerce Center II, a build-to-suit developed by Panattoni that should be complete in December. All three of these massive deals were done in the Metro East submarket on the Illinois side of the Mississippi River, which has become a haven for big box developments and a springboard for St. Louis’ emergence as a major regional and national distribution center.

Older product in the Metro East submarket will begin to hinder development in the next year, partly because of a wealth of existing modern bulk space. Developers have built more than 7 million square feet of such space in the past 3 years, of which 4.3 million square feet has been absorbed. Consequently, the vacancy rate for modern bulk space has increased from 2 percent to 16.3 percent since 2005. Regardless of the increased vacancy, the aggressive development allowed St. Louis to advance its position as a leading distribution center.

As for development, new construction added 1.68 million square feet of inventory during the first 9 months of the year, primarily in bulk distribution buildings. Local development firm McEagle has developed a 405,000-square-foot spec building in Hazelwood Commerce Center. It is the first building in the 151-acre industrial park located near Lambert International Airport. Balke Brown Associates and Clayco have teamed up to develop the 255 Logistics Center in Sauget, Illinois. Both buildings remain to be leased.

An additional 1.9 million square feet will be finished by year’s end. Fortunately, this influx of new space will be more than offset by the demolition of the shuttered Ford Assembly plant, which took 2.75 million square feet of space from the area’s inventory.

Spec development will become a rare commodity in the area during the next 6 to 12 months. While the vacancy rate continues to decline, new product in the pipeline, rising construction costs and the vice grip on capital have dampened developers’ prospects. 

There is an exception to this in the city, as infill sites have become more appealing. Developers do not face as much competition for product and can receive generous economic incentives for in-town properties. Tenants may find benefits in the potential to lower transportation costs through a centralized location.

St. Louis may have tread water during the first three quarters of the year, but it isn’t drowning in product. Restrained development has allowed vacancy rates to remain steady. In fact, the area’s vacancy rate declined from 7.2 percent to 5.7 percent through September. A large part of the declining vacancy rate, though, can be attributed to the demolition of the vacant Ford Plant. This alone reduced the vacancy rate by 1.1 percent.

Looking ahead, we expect the overall vacancy rate to inch up over the next year. Rental rates vary widely by product type and submarket but have leveled off during the year. Supply-demand favors tenants, leaving owners more concerned about keeping their occupancy up rather than raising rates. Significant incentives also can be found as owners try to draw new tenants to their buildings.

Suffice to say, the economy’s direction and the ongoing financial crisis leave left everyone guessing. Signs point to a slowdown in consumer spending, which will certainly impact the industrial market as suppliers pare back inventories on more than just large capital items.

— Ed Lampitt is a vice president and principal in Colliers Turley Martin Tucker’s regional office in St. Louis.

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