Like a baby boomer adapting to the new realities of social media and the digital age, the St. Louis industrial market has had to learn to reinvent itself during the down market we entered in 2008. Legacy industries that employed generations of St. Louisans and drove significant demand for space from suppliers and vendors have exited the market, leaving challenges and opportunities throughout the industrial real estate landscape here.
Prior to the downturn, St. Louis enjoyed the presence of automotive plants for all of the “Big Three,” with Chrysler, Ford and General Motors all producing vehicles here. Chrysler, in fact, had committed to invest more than $1 billion in its plants in the Fenton submarket until the global economic crisis sent the company into forced bankruptcy.
After acquiring locally based McDonnell Douglas in 1997, Boeing continued to be a major production force here. Several smaller companies across the business spectrum operated manufacturing and production facilities in St. Louis, providing opportunities for a highly skilled workforce.
The plot twist that followed isn’t unique to St. Louis, the Midwest or the United States, as so many are acutely aware. The closure of the Chrysler plants in Fenton (in favor of Canadian and Mexican facilities), and the Ford plant in the Hazelwood submarket, brought the effects of a worldwide downturn home in startling fashion.
Coupled with the cessation of operations by suppliers to those plants, a total of 5 million square feet of industrial real estate (more than 2 percent of the entire industrial building stock in St. Louis) went vacant in 2007 and 2008.
Coming on the heels of a 3-year construction cycle, which created 6 million square feet of speculative modern bulk warehouse product in a market where average annual absorption had been 1.5 million square feet from 2003 to 2007, St. Louis faced a daunting challenge. While obstacles remain nearly 4 years later, a combination of macro and microeconomic trends has enabled a recovery to take shape in the local industrial market.
DECISIVE SPACE USERS
For the first time since 2008, St. Louis was on track to record positive absorption for the year in 2011 (as of press time in late December). Total absorption year-to-date through the third quarter was 543,000 square feet. While that’s well off the average from 2003 to 2007, it is welcome news.
To create positive absorption, of course, companies must be willing to take on additional space. These occupiers seem to fall largely into two categories during the nascent recovery; large corporations in recession-resistant industries with sophisticated supply chains, and established smaller companies that are either self-funded or infused with private equity capital.
In the case of the large corporations, their well-honed supply chain structures have fostered confidence in making forward-looking real estate commitments. The opportunity to benefit from historically low occupancy costs has drawn occupiers like these to plan toward improving demand indicators.
Walgreens, for example, leased 500,000 square feet for a new distribution facility in Gateway Commerce Center in the Illinois submarket of St. Louis. Similarly, Procter & Gamble committed to 479,000 additional square feet in Gateway Commerce Center in 2011, adding to its already substantial presence there.
As for smaller companies, occupiers like Faultless Linen — a family-owned company in the growing healthcare field — took steps forward in St. Louis. Faultless purchased a 100,000-square-foot building for its third facility in St. Louis in September of 2011. Notably, the seller was in an automotive-related business and needed to downsize.
Private equity-funded occupiers also have been active. Being well financed and eager to capitalize on opportunities to expand via business acquisitions or new equipment purchases, tenants like Control Devices and Legacy Pharmaceutical Packaging were active in 2011. Control Devices leased 99,000 square feet in Fenton, while Legacy leased 129,000 square feet in the Earth City submarket.
INSTITUTIONAL CAPITAL RETURNS
A national uptick in large portfolio sales of industrial real estate has injected fresh capital into the Gateway City. Boston-based Colony Realty Partners added to its local holdings by purchasing an eight-building, 741,000-square-foot package in St. Louis.
Cobalt Capital acquired a multi-city portfolio, including 726,000 square feet in this market. The buzz is that more assets will come to market in 2012, which seems likely given the marked increase in exploratory inquiries from national investors.
Whether it’s the result of civic pride, the quality of life unique to the 18th largest metro in the U.S., or less positive factors like lack of opportunity elsewhere, St. Louis has pushed its way through the malaise of the last four years. Business and government leaders alike have tried to adapt to “the new normal” and have forged ahead despite the many challenges. As 2012 debuts, the St. Louis industrial market stands ready to grow.
— J. Patrick Reilly, SIOR, is senior director and principal with Gateway Commercial, Cushman & Wakefield Alliance in St. Louis.