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The St. Louis industrial market continues a slow and steady march toward recovery. The Midwest is often looked to for stability and consistency, and with the vacancy rate and lease rates changing little over the past two years, the description is holding true.
In fact, the overall average lease rates for warehouse space have only dipped slightly after holding steady, while vacancy has been a consistent 8.7 percent for warehouse product.
While the lease rates have been stable, we have begun to see sale prices drop, especially for vacant product. As these pricing changes begin to hit the market, the sense that we are at the bottom is prevalent, and the opportunities are there for anyone who can buy buildings with cash.
Changing of the Guard
While the real estate fundamentals may have remained the same for two years, the property ownership picture has changed quite a bit. The exit from the St. Louis market by TA Associates in January resulted in the entry of Cobalt Capital, which purchased the 13-building portfolio.
Beverly Hills, Calif.-based Blue Real Estate has seen its flex portfolio of 850,000 square feet go back to the lender, opening the door for another player to get into the flex market as well. Even beyond these portfolio sales, a shift has been taking place with individual buildings.
Exeter Property Group, based in Plymouth Meeting, Pa., is looking to expand its holdings in the metro area, following its purchase of a 19-building portfolio in 2011, which included a 450,410-square-foot distribution building in Granite City.
Boston-based STAG Industrial Inc. has picked up five buildings since entering the market a few years ago, and joins a group of smaller, focused funds looking for additional purchases with good rates of return.
Besides these occupied investment purchases, moves are being made with warehouses that have long been vacant. A great example is the Panattoni Development Co.’s purchase of 534,000 square feet on Hitzert Court in the Fenton area for approximately $17 per square foot.
Pricing like that can allow for extended vacant hold periods, or aggressive leasing proposals, which raises a question: Does that simply trigger tenants shifting from property to property, or will some real expansion and absorption be fostered?
Other large, long-vacant properties are under contract, which could mean about 2 million square feet will be “reset” for those properties. Buyers will have a relatively small investment in the space, giving them the ability to attract tenants at low leasing rates, especially when competing with building owners who purchased when pricing was at its peak.
Construction Standstill
One thing for sure in the St. Louis region is that the overall market size isn’t budging. There was no construction of note in 2011, and 2012 saw only a handful of small user buildings come out of the ground.
This should result in vacancy rates responding quickly to meaningful absorption, as the pipeline for construction remains essentially empty.
There is no shortage of places to build when the time comes. The 250-acre former Chrysler site in Fenton joins the 160-acre Aviator Business Park in Hazelwood as prime sites for new buildings.
Positive Signs
Some positive signs have emerged recently in St. Charles County, along the I-70 corridor. After moving into the marketplace with a purchase of 83,485 square feet in 2010, manufacturing firm ALPLA has purchased another building at 1 Gerber Industrial, taking 78,300 square feet of vacant space out of that submarket.
A 60,000-square-foot building was purchased at 825 Texas Court in O’Fallon, where the new owner will occupy a portion of the building and lease the balance of space.
Meanwhile, the GM plant in nearby Wentzville is completing construction of a new 500,000-square-foot facility which will begin to produce the Colorado mid-sized truck. That new activity at the plant should bring a half-dozen or so suppliers to the overall marketplace.
In St. Louis City, first-generation space in the Villa Lighting building has been leased after sitting vacant since construction of the facility in 2008. Nies/Artcraft took 94,080 square feet in the space, which fills the building.
In the North City submarket, Proline Property purchased 101,000 square feet at 4601 Riverview Boulevard, another long-vacant property that will now be occupied by the buyer.
— Andy Murphy, CCIM, is a vice president at St. Louis-based NAI DESCO.