SIOR Metro Market Forecast: Speculative Construction Returns

The
number one construction industry takeaway from the 2015 St. Louis Metro Market
Forecast by the Society of Industrial and Office Realtors (SIOR) was that 2015
starts a period of new construction. In each of the three commercial markets
surveyed by the realtors, office, retail, and industrial, speculative
construction already has begun or is expected soon.

Offices

Glenn Guenther, first vice president, CBRE, presented the forecast
for the office sector, the slowest of the three sectors to recover.

The story of 2014, he said, is that absorption and base rents were
up and vacancies and the availability of sublease space or large blocks of
space were down.

“Net absorption was one million square feet. We haven’t seen that
much absorption since 2006,” he said.

Pointing out that Class A office space is nearly 90 percent
occupied across the region, he said, “There’s been a nearly 50 percent
reduction in Class A vacancy since 2010. I know of six to eight users who are
looking for blocks of at least 50,000 square feet of Class A space and there
aren’t that many available.”

He then focused in on three active submarkets: Downtown, Clayton,
and North County.

Net absorption in Downtown last year was 237,000 square feet. “I’m
more encouraged about Downtown than at any other time in my 30-year career,” he
said.

In Clayton, space is so tight that large users are playing musical
chairs when something opens up.

And North County saw net absorption of 475,000 square feet in 2014
and a 40 percent decline in the vacancy rate from 14 percent to 8.5 percent.

Rising rents and few choices in Class A space will have a domino
affect sending some Class A tenants down market to Class B space, pushing Class
B rents and sending some existing Class B tenants to more affordable Class C
space. All of those moves could spell more renovation work for contractors.

Although no new speculative office developments have been announced,
Guenther predicted that rising rents and shrinking availability will lead to
the start of speculative construction soon. Highlighting two projects that have
been on hold since the recession, he said, “We could see Delmar Gardens III
moving ahead in the next few weeks or a Spirit of St. Louis Corporate Center.”

Delmar Gardens III is a proposed 125,000-square-foot, five-story,
office/medical building on North Outer 40 Road in Chesterfield. The website for
Delmar Gardens Properties proclaims that the project is “Coming in 2015!”

Spirit of St. Louis Corporate Center was a proposed
260,000-square-foot office building on Spirit Center Drive in Chesterfield.

Three “game changers” could dramatically change the outlook for
the market, Guenther said, and all 
three are in the St. Louis city.

• The impact of the completion of the CityArchRiver project “could
be the economic equivalent of adding a second Cardinals’ baseball season every
year to downtown,” he said.

• One million square feet of space is coming available at the
AT&T Center in downtown St. Louis in 2016. Whether the outcome of that is a
creative redevelopment or a vacant white elephant is yet to be seen, he said.

• “Cortex is becoming a highly desirable office destination,”
which could spur nearby development, he said.

Retail

John Shuff, senior vice president, Gershman Commercial, presented
the retail forecast.

The overall retail vacancy rate is only 6.9 percent. With the
large number of national chains entering or expanding in the St. Louis market,
Shuff predicted 1.25 million square-feet of new retail and grocery construction
in metro St. Louis over the next three years.

Major new developments in the works include:

• 120,000
square-feet by Summit Development at Dale and Hanley Avenues

• the
130,000-square-foot Midtown Station development on Forest Park Boulevard,
across Vandeventer Avenue from the new Ikea store

• an
expansion of Taubman Prestige Outlet stores in Chesterfield

• two
Opus mixed residential and retail developments, one in the Central West End of
St. Louis and one in Clayton

• a Fresh
Thyme Market under construction at Manchester & Lindbergh

• a $60 million
renovation of the retail portion of Union Station

Among the chains entering the market or eyeing locations for new
stores in metro St. Louis, he said, are:

• Walmart

• Gander
Mountain

• Dick’s
Sporting Goods

• Academy
Sports + Outdoors

• Hobby
Lobby

• Menards

• Pet
Supplies “Plus”

• Total
Wine

• Tim
Hortons

• Mellow
Mushroom Pizza

• Weber
Grill Restaurant

• Twin
Peaks

• The
Capital Grille

• Del
Frisco’s Steak House

• Seasons
52

• Kona
Grill

• Fogo de
Chao

• Fresh
Market

• Fresh
Thyme Farmers Market

• Lucky’s
Market

• Gordon
Food Service

• Ruler
Foods

• Trader
Joe’s

•Aldi

 

All the
new and growing competitors in the grocery segment could prompt Schnucks and
Dierbergs to relocate and build new stores to compete, he said.

 

Industrial

J. Patrick Reilly, senior director, Cushman &
Wakefield/Gateway Commercial, presented the industrial forecast.

The year 2015, “is the start of a period of new construction,” he
said.

The recovery has finally taken hold. In 2014, “demand took off,”
he said. The overall vacancy rate is only 6.4 percent, which is the lowest
level since the fourth quarter of 2008, Reilly said. In modern bulk
warehousing, the vacancy rate is only five percent, the lowest level since the
fourth quarter of 2005.

“There are only five options available that are larger than
100,000 square-feet,” he said.

The vacancy rate in Illinois is only 2.9 percent, and over one
million square feet of new space already is under construction on the east
side, a 673,000-square-foot building at Gateway Commerce Center and a
410,000-square-foot building at Lakeview Commerce Center.

Another 900,000 square-feet of new construction in North County
has been announced: 600,000-square-feet of speculative space at Aviator
Business Park in Hazelwood (for site of the former Ford assembly plant), and
311,000-square-feet for SKF in NorthPark.

Developers, he said, “are primed to build up to 26 million
square-feet” at five area business parks: Gateway Commerce Center and Lakeview
Commerce Center in Illinois, Aviator Business Park and NorthPark in North
County, and Fenton Logistics Park at the site of the former Chrysler assembly
plants in Fenton.