By Jake Corrigan, Sansone Group
As we reflect on the tumultuous year of 2020 and the COVID-19 restrictions that decimated the retail real estate sector, those of us on the industrial side of the equation are breathing a sigh of relief.
While there have been small pockets of industrial users and owners that have been adversely affected, the industrial market has remained strong as a sector. We anticipate this trend to continue.
Statistics continue to show the conversion of the brick-and-mortar shopper to online is on the fast track. In the last 10 years, the meteoric shift to online shopping has increased from 7 percent in 2010 to just under 25 percent at the end of 2020, according to the U.S. Census Bureau. COVID-19 has forced the otherwise reluctant online shopper to shop for goods they had never thought to have delivered to their door. As a result, online retailers have dramatically improved web-based interfacing and ease of shopping.
Jake Corrigan, Sansone Group
Active development
These realities have supply chain experts, third-party logistics (3PL) companies, owner/users, and of course, mega online retailers clamoring for blocks of vacant space to house their inventories. Developers active in the St. Louis metropolitan statistical area (MSA) have reaped the benefits.
Unlike other real estate sectors, most industrial developments were paused temporarily due to the crisis but regained momentum once the initial quarantines lifted. In 2020, developers delivered roughly 2.4 million square feet, with another 2.5 million square feet currently under construction.
US Capital Development completed Building 7 at Fenton Logistics Park. The 190,350-square-foot build-to-suit for Amazon brought the park to full occupancy. It would not be a surprise to see this portfolio hit the market in 2021.
Duke Realty saw an influx of tenants in 2020 into Premier 370 in St. Peters, including an 855,000-square-foot build-to-suit for Amazon, expansion of Reckitt Benckiser and the sale of 40 acres to Medline for future development.
Duke has no immediate plans for speculative development in St. Louis and chose to close a handful of midwestern markets, including St. Louis, as the company shifts its investment strategy to top-tier coastal markets for development and acquisition.
Minneapolis-based Opus Group has also been busy completing the 154,000-square-foot, speculative Soulard Commerce Center in the city of St. Louis. Opus also broke ground on the 111,000-square-foot, speculative Earth City Commerce Center, one of only two in this submarket in the last decade.
The market should see speculative construction slow a bit in 2021 with a gradual shift to build-to-suit projects. Those developers who have secured tax abatements in Southern Illinois and Hazelwood, Missouri, will push forward with speculative construction.
The emergence of more specialized distribution buildings with higher ceiling heights, column spacing, HVAC, above-standard power requirements and unique picking and sorting technology, are becoming the norm. Expect developers to be more hesitant to build on a speculative basis with such broad requirements. Next-generation buildings will become the norm. E-commerce and specialized manufacturers are looking for enhanced coverage in the central U.S., placing cities like St. Louis in their crosshairs.
While St. Louis does lag a bit behind our peer cities in the Midwest such as Columbus, Indianapolis, Nashville and Chicago, the conservative, steady pace of growth has always been the reality here. With that being said, the St. Louis MSA has a population of around 3 million people. That gives us the critical mass we need to attract large e-commerce and 3PL distributors.
Reasons to remain bullish
As we turn the page on a productive, and at times crazy year, a few trends keep us bullish on the St. Louis industrial market’s growth. We have continued to see rent growth rise to all-time highs of $5.70 per square foot. Even with the influx of new buildings over the past three years, the market has performed well by absorbing it at a robust clip, keeping vacancy around 5.5 percent.
Locally, COVID-19 has slowed our capital market deals. A combination of equity taking a “wait and see” approach and restrictions on travel made portfolio deals challenging to transact. As we work toward coming out of the pandemic malaise, the pent-up institutional capital has been eager to place money. Most of the large industrial owners have moved toward the top 10 markets, making competition from small and middle-tier capital groups virtually impossible.
The cost of capital remains relatively attractive. As a result, some of the smaller to mid-sized investor groups will be positioned to pounce on second- and third-tier markets like St. Louis and others in the Midwest as sellers either look to vacate the region or capitalize on historically high pricing.
We have all been riddled with office closures, Zoom meetings and cities closing — reopening only to close again. With that said, retail goods continue to move on our rivers, railways, airplanes, oceans and highways. This trend does not appear to be stopping anytime soon.
To put it very simply, as the public demands products at the door tomorrow, the goods have to be produced and warehoused in close proximity to users. St. Louis is poised for another year of conservative growth to meet this demand.
Jake Corrigan serves as executive director of industrial services for Sansone Group. This article originally appeared in the January 2021 issue of Heartland Real Estate Business magazine.