The St. Louis industrial market continues to rally after posting 22 straight quarters of positive absorption. Record leasing activity and historically low vacancy have put the region on pace to deliver another 6.5 million square feet of Class A industrial space in 2019.
This is in a market that averages deliveries of approximately 2.5 million square feet annually. Current drivers engendering this industrial activity include the following.
Discipline
Developers in St. Louis have long been known for their disciplined approach to building. Vacancy in a stable market hovers near 7 percent for the region. The vacancy rate for industrial space leading into the third quarter was 5 percent, up slightly from the previous quarter, according to CoStar.
Vince Bajardi, Sansone Group
Continued speculative development, particularly in the Metro East, added to the increase. This, coupled with a large vacancy left in Lakeview Commerce Center by World Wide Technologies as it shuffles into a new 2 million-square-foot facility in Gateway Commerce Center East, were the most evident culprits. Expect vacancy to uptick slightly again in the third quarter as speculative deliveries by NorthPoint Development at Gateway Tradeport along with Exeter in Gateway Commerce Center come online.
E-commerce
No discussion surrounding the industrial market would be complete without mentioning e-commerce. Amazon has opened its first robotics fulfillment center in Missouri, an 855,000-square-foot facility situated in Duke Realty’s Premier 370 just west of downtown St. Louis. This marks the fifth building Amazon has occupied in the region in the past three years. In the same park, medical supply chain provider Medline just announced the purchase of 52 acres for a build-to-suit distribution center totaling 800,000 square feet.
Smaller, regional players however are expected to be the darling in the near-term. Already the market is seeing the highest demand in the 50,000 to 150,0000-square-foot user range. US Capital Development is building its fifth building in Fenton Logistics Park to accommodate these smaller users and recently announced a 182,400-square-foot, $20 million build-to-suit for the world headquarters of 1st Phorm, the parent company of Supplement Superstores.
Canna-biz
Cultivation, manufacturing and dispensing of cannabis products were made legal for medical purposes earlier this year with licenses expected to be awarded by year’s end. The state is in the process of evaluating license applications for 60 cultivation facilities, 86 manufacturing facilities and 192 dispensaries. Application guidelines hint that in order to obtain a license, aspirants need to show control of the real estate that will house the operation. According to the state’s website, 2,163 applications have already been received.
The promise this new industry brings has instigated a frenzy of activity for Class B and C owners. Cultivation and manufacturing operators are the obvious inhabitants of industrial space. Requirements have ranged from 12,000 to 80,000+ square feet depending on the use. If only a fraction of the licenses applied for were awarded to St. Louis-area applicants, then absorption could total 2.4 million square feet of new space for this use alone.
Tariffs and trade
The failed negotiations with the Chinese government caused investors to question whether the economy would correct. The ongoing spectacle however has had a positive impact on the St. Louis market.
Local companies anticipated that the tariffs would go into effect so they responded proactively while a long-term solution could be instituted. How? They pre-ordered product and increased inventories before the tariffs went into place. As a result, existing businesses expanded, outsourced to third-party logistics companies or relocated to newer buildings with higher ceilings to capitalize on cubed space.
This is a short-term reaction, but one that St. Louis companies had the foresight to navigate. Few, if any, manufacturing jobs will come back to St. Louis in response to the tariffs. Most companies are concocting solutions to manufacture in other countries where the U.S. has more favorable trade agreements in place.
Labor
Regional unemployment sits at just 3.4 percent, according to the St. Louis Federal Reserve. The demand for new jobs is in the positive. The availability of quality labor will play a major role in the region’s continued success. Less than stellar population growth in the region could temper expectations.
According to a recent report released by the Federal Reserve, “From 2000 to 2018, the population of the St. Louis metropolitan statistical area (MSA) increased from 2.68 million to 2.8 million, a cumulative growth rate of 4.7 percent. That’s less than the national growth rate of 19.9 percent over the same period and less than the rates of nearby, similar-sized MSAs, such as Kansas City (17.9 percent) and Nashville (39.2 percent).”
Sustainment
The St. Louis industrial market is on trend to continue its disciplined building as developers dramatically reduce speculative development and focus on build-to-suit projects. In response to increased regional competition, systematic investment in transportation, geopolitical restructuring and contemplating the privatization of Lambert St. Louis International Airport will work toward positioning the region to be poised for continued progress.
— By Vince Bajardi, Executive Director, Industrial Services, Sansone Group. This article originally appeared in the September 2019 issue of Heartland Real Estate Business magazine.