By
Jim Baer
After interviewing seven senior-level officials and reviewing
the presentation of another half-dozen on video, an emerging
trend is definitely developing in the local real estate market.
Earlier this year, Colliers Turley Martin Tucker (CTMT) presented
its second State of the Real Estate Forum at the Botanical Garden,
geared for the local business community. The report indicates
cautious and slow growth for 2007. But as one official predicted:
“When it’s time to go, then developers had better be ready to
go.” History shows that growth in St. Louis’ real estate market
is steady and predictions are such that available real estate
space once more will shrink.
Generally speaking, 2007 will bring even less speculative space
to the market. Growth will continue in business-rich Clayton
and along the I-64 business corridor of West St. Louis County.
Southern Illinois will hear the sounds of development which
will be music to the collective ears of the business community.
Regional employment continues to increase, and opportunities
exist for savvy developers and investors. Industrial land will
be the most prominent type of property in demand in 2007.
But as Jay Holland, senior vice president and principal for
CTMT likes to say, “The growth will be mostly organic.”
By that, local company expansion will call for the most demand
for new office space. Growth in companies such as Anheuser-Busch,
Express Scripts, World Wide Technology and TALX means office
space expansion. Worldwide has added 550 new employees while
leasing 800,000 square feet of contiguous office space the past
two years.
Holland says most expansion is with smaller companies, looking
for around 2,500 square feet of space. “Confidence leads to
expansion,” he says, searching for an explanation.
St. Louis has to maintain its position as a second tier city
in what is classified as the Upper Midwest or Great Lakes region
of the U.S. Chicago ranks as the premier Midwestern city and
the greatest competition, of late, comes from Nashville where
the business and medical market is booming.
“Real Estate in general is becoming a less risky investment
for the major firms,” indicates Paul Hilton, senior vice president
in the CTMT investment services’ group. “Baby Boomers are putting
more money into private investment funds and that is allowing
investment firms to build new construction,” he says. “Building
hotels and senior housing is a whole new concept for investors,”
says Hilton.
Mike Hanrahan, vice president of investment services, says this
will be a great year to be in the St. Louis market in general.
He anticipates a steady one to two percent growth rate in 2007
regionally.
“Private capitol sources and market share is up 68 percent.
St. Louis has a higher private rate than other investors and
the cap rate is very attractive for St. Louis,” he states.
Investors are putting their money into is industrial development
these days. Over $240 million in investments have been made
the last two years in regional distribution centers in Edwardsville.
St. Louis is competing head-to-head with Chicago for that segment
of the market.
Jim Mosby, senior vice president, principal, and investment
broker, says investors need to be cautious. “In 2001 developers
rode the tech boom and we saw what happened when they got caught.
Expansion needs to come in a steadier mode,” Mosby predicts.
Holland points to expansion through steady growth. “Companies
like Blackwell Sanders, Bryan Cave and Peabody Coal need more
space, because their expansion has been slow but steady. Look
at Smurfit Stone. They consolidated offices at three locations
and are completing a move into a new headquarters soon in Creve
Coeur.”
Mosby concurs, “I don’t hear a lot of negative talk about this
market.” Mosby pointed to the highest vacancy rates being 19
percent for the region a few years ago, and down to 13 or 12
percent today.
As Holland indicates, landlords need rent growth to maintain
a comfort level. “We need to be in the $23 to $28 range (per
square feet) of Class A office space to maintain growth. It’s
a game of just when to go,” predicts Holland.
Keith Zeff, director of research and principal for CTMT says
the ideal situation is “moderate growth.” St. Louis doesn’t
suffer the wild swings of say a Houston, where the office market
crashed due to the oil bust a decade ago.
Meanwhile Hassan Jadali, vice president and principal in the
land brokerage department is a bit more cautious. “The word
is the market is slow and homebuilders are going to stay on
the sidelines for now. Home building is down 14 percent,” indicates
Jadali. “There’s a lot of inventory in the housing market (spare
lots) and many homebuilders have begun cutting back.
Jadali sees optimism more in the development of larger projects.
By that, he points to plans such as the new Clayton Centene
Corp. Plaza and the completion of the Express Scripts Headquarters
in North St. Louis County.
Jadali predicts growth for the next year-and-a-half, and then
forecasts a screeching halt for a short while. “It is always
that way going into a National Election. I don’t know exactly
why, but developers are afraid to make any moves about three
months before the big elections,” he says.
Tiffany Wiegers, also in land brokerage, keeps a wary eye on
the housing market. “Conversion is the big thing,” she indicates,
referring to the turn of apartments into condominiums. “A lot
of that is going on, especially in cities like Clayton,” she
accounted.
Jadali says the boom market is on the eastside, ticking off
O’Fallon, Shiloh, Waterloo and the east end of Belleville. “Those
are the hot growth markets,” he says.
All CTMT personnel prefer to breakdown development by commercial
areas. Here’s what’s going on in the major centers:
DOWNTOWN
Of late, there has been more than 200,000 square feet of positive
absorption of office space. This is leading to a decrease in
vacancies and an up-tick in rental rates. Still, overall business
in the downtown market is a little thin. On the good side, there
is only five percent vacancy in the five largest downtown buildings.
The start of Ballpark Village (a $650 million dollar project
by Cordish Co. of Baltimore) will signal another growth spurt,
and the demand for downtown residential lofts has been remarkable.
When Met Square and Bell Center came on line, Holland indicated
the results predictably saying: “You heard a sucking sound all
over downtown.” By that, a lot of companies abandoned space
in older buildings i.e. Syndicate Trust and the Paul Brown Building
and never recovered.
Hilton is confident of Ballpark Village, but less so of the
office portion of the project. “It will take longer for the
office market to be further developed downtown,” Hilton predicts.
CLAYTON
Work begins soon on the 800,000-square -foot, $190 million dollar
Centene Corp Plaza on the former Library Limited site. Office
and residential spaces are topping out the Ritz Carlton location
and there are single digit rental vacancies in Clayton overall.
“Right now, there is no new speculative construction planned
for Clayton and there’s pretty much a cap on development,” says
Holland. Holland indicated that Clayton’s municipal leaders
are strong planners and key to much of the cities growth and
success.
“Clayton is the most desired, and the highest rents in the area
are paid there,” indicates Hilton. “In Clayton, you are seeing
smaller buildings giving way to bigger buildings.” Hilton compares
Clayton’s diverse growth (commercial, office, hotel and restaurants)
to unique enclaves such as Atlanta’s popular Buckhead district;
Cambridge in Boston and Chicago’s suburban Oak Park. Hilton
labeled Clayton a superb development of an urban atmosphere
in a suburban environment.
WEST ST. LOUIS COUNTY
Actually, 2006 was a banner year and demand for commercial space
remains high along I-64 and in the Chesterfield Valley. There
are low single digit vacancies in Class A office buildings and
the word is that medical space, especially along Clarkson Road
will be in high demand there. Rental rates in the west are in
the $30 to $35-square-foot range. Investors will continue to
buy in what Hilton calls a “sub market” and predicts new construction
there as the space tightens up. All kinds of mixed-use office
developments are springing up around the perimeter of the Spirit
of St. Louis Airport.
NORTH COUNTY
Express Scripts moves into its brand new 320,000 square feet
headquarters for 1,100 employees on the UM-St. Louis campus
later this year, and the McEagle North Park project for warehouse
space adjacent to the airport is up for grabs. On the flip side,
Express Scripts is leaving Riverport (still considered North
County) and the 130,000-square-foot facilities will increase
available space, along with the 80,000-square-foot left behind
by Williams Communication along Rider Trail in Earth City.
SOUTH COUNTY
South County continues to retain the lowest vacancy rate among
the metro’s office markets. Its 7.5 percent vacancy rate was
down on the strength of 59,000 square feet of absorption in
2006. Anheuser-Busch leased significant space at several South
County locations including Laumeier Office Park and the Southwest
Executive Center.
ST. CHARLES
The boom is not yet over in St. Charles. Overall construction
was down five percent in 2006. Mixed-use and the demand for
increased medical space will continue fueling the office and
retail space market on the far side of the Missouri River. Effective
rental rates are in the $16 to $20 range and climbing.
ILLINOIS
Demand for industrial warehouse space on the east side remains
very strong. Nearly five million square feet was completed in
2006 and occupancy increased by 2.3 million square feet. Illinois
led the metro area in 2006 absorption with 1,097,000 square
feet and the demand for speculative space should rise dramatically
in 2007.
SUMMARY
This all goes to show that growth is steady, if not spectacular
regionally. The region has 2.8 million residents and workers
require a lot of office space. Dean Mueller, managing principal
for CTMT summed up the situation during the second annual report.
“The year 2006 was very good for commercial real estate, and
2007 could be even better,” he says cautiously.
The case for real estate activity in 2007 has been made.
