CITY HIGHLIGHT, NOVEMBER 2009

ST. LOUIS CITY HIGHLIGHTS

St. Louis Office Market

The St. Louis office market has outperformed most other cities in the United States while holding relatively steady through the economic downturn. Vacancy rates have risen only one percentage point during the past year, ending the third quarter at 15.6 percent. Average lease rates have declined by less than a quarter per square foot, ending the third quarter at $18.65 per square foot overall.

Leasing activity has picked up slightly in the last few months, and there have been a limited number of investment sales taking place. Overall, the market has mostly been buoyed by build-to-suit projects and either the renewal or relocation of several large law firms.

The publishing company Elsevier recently completed and moved into its new $20 million corporate campus at Riverport Business Park in Maryland Heights, while the biotechnology giant Monsanto has moved into a pair of buildings totaling about 244,000 square feet at Lakeside Crossing in the Westport submarket. The pharmacy benefits firm Express Scripts also continues to grow and has completed multiple phases of its headquarters on the campus of the University of Missouri-St. Louis. In the Clayton submarket, Centene recently began construction on its 480,000-square-foot high-rise headquarters, which will have 120,000 square feet of speculative space available for lease.

While some projects have flourished, some have been delayed due to the economy. Plans for the $550 million Ballpark Village, which would be the first new office construction downtown in a decade, have continued to struggle with financing concerns. Ballpark Village is a joint project between the St. Louis Cardinals and the developer Cordish Company that would be located on the site of the former Busch Stadium and have more than 325,000 square feet of office space, along with retail and entertainment uses. A large campus for Brown Shoe in Clayton has also been delayed.  And the merger of Anheuser-Busch and InBev is already impacting the St. Louis office market, with the brewer looking to sublease large amounts of its office space.

Active users in the market have been led by a number of law firms, many of which have signed significant renewals or new leases in 2009. At the end of the third quarter, Thompson Coburn renewed its lease of 238,000 square feet at US Bank Plaza downtown, while earlier in the year Polsinelli Shughart consolidated its offices in the Deloitte building downtown.  The downtown submarket will lose a large tenant though, as law firm Armstrong Teasdale announced it would move into the Centene project in Clayton in 2010.  Additionally, Husch Blackwell Sanders chose to consolidate its offices into one location and expand in Clayton as well. Among other large user-based transactions, investment firm Scottrade bought two office buildings totaling 380,000 square feet and 14 acres of vacant land in Maryville Office Park in a $60 million purchase.

While it is clearly a tenant’s market from a negotiating perspective, there are currently no Class A suburban low-rise buildings available for lease. Unless a user of that size is willing to consider downtown, a build-to-suit transaction is the only solution.

Finally, the St. Louis market has begun to see an increase in the number of distressed properties that are in play, with a growing amount of lender participation through refinancing, workouts or foreclosures. The trend is expected to continue for the next 12 to 18 months.

— Tripp Hardin is a senior vice president at CB Richard Ellis’ St. Louis office.

St. Louis Industrial Market

The old adage that every cloud has a silver lining holds true for the St. Louis industrial market. After posting positive absorption during every quarter of the current recession, the industrial market got cloudier when Chrysler shuttered its St. Louis plants during the early part of the third quarter. That placed more than 5.1 million square feet of space on the market and boosted the vacancy rate a couple points.

The auto industry’s woes trickled down to a number of Chrysler’s suppliers as well. Another 2.1 million square feet of auto supplier buildings also became available.

So where’s the silver lining? Actually, there are several.

For starters, Chrysler’s plants and its suppliers are primarily located in the South County submarket. Historically, South County has been one of the area’s strongholds for industrial, with a vacancy rate of only 4.2 percent at the end of the second quarter. The availability of space now opens opportunities for large and small users.

A number of companies have already taken advantage of these opportunities. Colt Industries, the area’s distributor for Corian countertops, purchased a nearly 100,000-square-foot building formerly occupied by Dakkota Integrated Systems, which supplied vehicle interiors. An aerosol can supplier has signed a letter of intent for nearly 247,000 square feet formerly occupied by a seat supplier. A printer is negotiating to lease nearly 118,000 square feet in a building used by Oakley Industries, another Chrysler supplier.

In all, deals have been completed or are in the works for more than 40 percent of the space formerly used by Chrysler suppliers.

Secondly, the Chrysler plants will more than likely face the wrecking ball. This will open a wealth of opportunities for industrial users in a key distribution corridor. By and large, the infrastructure is already in place.

A similar situation has already occurred with the former Ford plant in the North County submarket. It was demolished and now offers 155 acres for development. Panattoni Development is actively pricing several potential projects in the mixed-use park, with plans for 11 buildings totaling more than 2.6 million square feet.

The biggest obstacles to this and other development aren’t interest, but economic uncertainty and tougher standards for financing.

All in all, the St. Louis industrial market stands in much better shape than other major metropolitan areas such as Atlanta, Baltimore, Chicago and Los Angeles’ Inland Empire. Even with the Chrysler closure, the industrial vacancy rate finished the third quarter at 8.7 percent. Historically, the area is balanced at around 7 percent vacancy, and anything less than 10 percent is manageable.

Restrained development has been a big plus as the global economy slowed and consequently put the brakes on one of the biggest drivers of industrial space. No new spec buildings came out of the ground in 2008. Only one large spec warehouse was completed in the last 2 years, a 400,000-square-foot development built by McEagle Properties in the Hazelwood submarket. Plans for the big box were well underway before the economy took a nosedive, and the building remains vacant.

Nearly all new developments are either build-to-suit or preleased. Villa Lighting moved into its new 239,000-square-foot headquarters during the second quarter. Late last year, World Wide Technology moved into its 700,000-square-foot, build-to-suit distribution center in Panattoni’s Lakeview Commerce Center across the river.

Additionally, the market has seen its share of large leases. Across the river in the Gateway Commerce Center, the area’s largest industrial park, Dial Corporation renewed its lease for 800,000 square feet, Procter & Gamble expanded its distribution with 373,000 square feet and OHL added another 400,000 square feet to its third-party logistics operations. World Wide Technology is actively reviewing options to locate an additional 300,000 square feet.

Green Street Development has been one of the area’s most active developers. Launched last year by Phil Hulse and Mike Clark, long-time area commercial development powerhouses, Green Street has purchased a number of former manufacturing and distribution sites in the city. The company is redeveloping the sites with LEED-certified, multi-tenant industrial and mixed-use business parks. The city has seen little industrial development for several years. Green Street is providing opportunities for users who need easy access to the central business district, as well as those companies that have a large workforce living across the river.

Clayco and McEagle Properties also remain poised to develop NorthPark Business Park, a 550-acre development located near Lambert-St. Louis International Airport. Nearby, McEagle is also developing the 151-acre Hazelwood Commerce Center, and Panattoni has the former Ford plant site ready for users.

The St. Louis industrial market has more than 1,000 acres of development approved and ready to go. A couple of large projects should be announced soon in these developments, which could trigger more demand.

The skies may be cloudy today, but that silver lining should bring sunshine once the economy returns to better days.

— Terry Stieve is senior vice president and principal in Colliers Turley Martin Tucker’s regional office in St. Louis. He specializes in the industrial market, including leasing, sales, land acquisition and development.

St. Louis Multifamily Market

Several factors have contributed to the softness in the St. Louis apartment market and are expected to continue to present operational challenges in the near term. A spike in construction has been met with weak demand caused by the slumping labor market. In fact, demand for rental housing contracted 2.2 percent year over year in the third quarter, the largest decline in more than 20 years, and will likely fall until payrolls begin to expand. As a result, owners have increased concessions to roughly 26 days of free rent. With vacancy on track to rise further this year, concessions will remain elevated, particularly in the Maryland Heights/Northwest County submarket. Area operators are currently offering renters nearly 40 days of free rent, the most of any submarket in the metro area, and 11 days more than was offered last year. Nonetheless, many residents are opting to relocate out of the area and into St. Charles to capture lower rents or into Clayton to be near the metro’s healthiest employment corridors. As such, owners in the Clayton/Mid-County submarket have kept concessions relatively flat during the last 12 months.

Turning to investment sales, transaction velocity has slowed in the St. Louis market due primarily to reduced pricing and increased buyer caution regarding weakened fundamentals. Additionally, activity from out-of-state investors has dropped off considerably; there have been no sales involving out-of-state buyers during the last 6 months. The handful of local buyers who remain active in the metro area are targeting smaller assets with relatively healthy occupancy rates, as these properties are generally best-positioned for revenue growth once the local economy gains traction. Recent deal flow has been concentrated in the east of Interstate 44 and St. Louis City South submarkets, especially near Interstates 64 and 44. Asking rents in these areas are among the metro’s lowest, attracting residents seeking to control costs. Furthermore, initial yields in these submarkets are approximately 25 basis points higher than the metro average, making financing somewhat easier to obtain.

Market Highlights

Employment: Following the elimination of 18,700 positions last year, employers are expected to cut 43,000 jobs in 2009, an annual decline of 3.2 percent, led by significant weakness in the office-using segments.

Construction: Developers are projected to complete 795 units in St. Louis this year, a 0.7 percent increase in inventory. In 2008, just 230 units were delivered.

Vacancy: Renter demand is expected to remain weak through the coming quarters due to job losses and an increase in the number of alternative housing options. As such, vacancy is forecast to end 2009 at 9.6 percent, 180 basis points higher than last year.

Rents: Owners will continue to curtail asking rents and expand incentives to counteract waning demand. Asking rents are expected to finish the year at $720 per month and effective rents will be $687 per month, decreases of 1.3 percent and 2.7 percent, respectively.

— Stephen Maulden is the regional manager of the St. Louis office of Marcus & Millichap Real Estate Investment Services.

©2009 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.