Heartland Real Estate Business

FEB 2018

Heartland Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Midwest.

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- 16 • February 2018 • Heartland Real Estate Business www.REBusinessOnline.com M A R K E T H I G H L I G H T: S T. L O U I S TIGHT INDUSTRIAL MARKET ENCOURAGES LARGE-SCALE CONSTRUCTION IN ST. LOUIS With what appears to be a never- ending stream of construction, the big- gest source for excitement coming into 2018 for the St. Louis industrial market is new, speculative development. According to research from Colliers International, construction comple- tions exceeded 4 million square feet in 2017. This is the second-highest year of recorded construction volume for the market due to last year's Goliath delivery of 6 million square feet. Currently, over 2 million square feet is under construction, with more slated for groundbreaking in 2018. One of the larger projects recently announced is NorthPoint Develop- ment's proposed 300-acre industrial park in Hazelwood, situated in North St. Louis County. According to the St. Louis Post-Dispatch, NorthPoint plans to develop over 3 million square feet focused on logistics and light indus- trial warehouse space. The big question, it seems, is how long can developers continue to find new tenants for their large, modern bulk developments in St. Louis? Even with high, positive absorption in both 2016 and 2017, expectations for con- tinued growth may be tempered as we move forward in 2018. Looking back at 2017, we see the industrial vacancy rate for metro St. Louis dropped to 6.7 percent at the end of the year. This rate is down 3.5 percentage points from 2010 when rates peaked at 10.2 percent. Following a record-breaking year of absorption in 2016, the industrial mar- ket ended 2017 with nearly 4 million square feet of overall positive net ab- sorption. Asking rents felt increasing pressure throughout the year, rising to $4.46 per square foot in 2017 — the highest average asking rate since 2008. New market entrants Leasing activity and speculative construction, specifically in tax-abat- ed parks, were red hot in 2017. E- commerce and third-party logistics companies led the way for overall absorption. Over 90 percent of new construction added to the St. Louis market was speculative development. After entering the St. Louis mar- ket in 2016 and leasing nearly 1.5 million square feet, Amazon added 450,000 square feet to its footprint locally in 2017. GEODIS, a logistics and freight transportation provider, leased 624,000 square feet in the new- ly completed Gateway East 624. Fair- field Processing Corp. placed its dis- tribution facility in North Broadway Distribution Center and currently occupies 300,000 square feet. Lastly, e- commerce fulfillment company Quiet Logistics now occupies 270,000 square feet in Hazelwood Logistics Center 2. Even with all this activity, large users needing 200,000 square feet or more began touring properties less frequently toward the end of the sum- mer in 2017. The change came as no big surprise though, because the mar- ket grew relatively thin. With a scar- city of large blocks of available space, build-to-suit development became the only viable option for these tenants. Meanwhile, sales activity boomed. Investors witnessed the uptick in growth and eyed St. Louis inventory carefully for opportunities. In 2017, approximately 11.6 million square feet of space traded hands in the St. Louis industrial market, up from 7.4 million square feet for the year prior. This was the highest level of regional sales activity in a decade, according to Colliers. What's next? Occupants needing 20,000 to 70,000 square feet currently drive demand in St. Louis. Many companies are search- ing for small- to mid-size standalone buildings, which, as of yet, represent an untapped market for developers. Construction of buildings under 100,000 square feet made up less than 5 percent of new development in St. Louis. Out of this total, only three buildings hiĴing the market in 2017 were developed on a speculative basis. Many users need flex space and are looking for corporate headquarters. This is particularly true in St. Louis County along the I-44 corridor. Cur- rently, there is no construction activ- ity for flex space going on in St. Louis. If developers can find the right spots for development, this might be the next hot area for St. Louis. In re- cent months, flex buildings have been trading fast, many of these deals off- market. Land in St. Louis is a hot com- modity as well. One of the major hurdles for the St. Louis market, and the country, in- volves labor supply keeping up with industrial construction and demand. Unemployment has dropped to near record-low levels for some St. Louis municipalities. According to the U.S. Bureau of La- bor Statistics, the unemployment rate in St. Louis County stood at 3 per- cent, with the city of St. Louis at 3.8 percent as of November 2017. As part of the greater St. Louis metropolitan region, St. Charles County enjoyed an unemployment rate of 2.6 percent, up slightly from the decade low of 1.8 percent in October 2017. On the Illinois side, the metro east submarkets have posted slightly high- er unemployment rates with Madison County at 4.4 percent and St. Clair County at 4.8 percent, according to the November numbers. However, both are on a downward trend. Madison County's unemploy- ment rate dropped from 5.4 percent year-over-year since peaking at 11.4 percent at the beginning of 2010. St. Clair County was at 5.1 percent in No- vember 2016 and topped out at 11.7 percent in January 2010. Distribution companies are not only looking for the most cost-effective lo- cations to build and move to, but they also require a labor pool to match their needs. Going forward, increasing the labor supply in St. Louis will be the big- gest challenge for the metro area. If the market succeeds, St. Louis could continue to pull new large users to the market that can spur growth for the next few years. Allison Gray Director of Research, Colliers International St. Louis Construction is well underway for Duke Realty's Premier 370 Business Park in St. Charles, northwest of St. Louis. This photo was taken in June 2017.

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