THURSDAY, JUNE 04, 2009
by Dan RafterSt. LouisLarry Chapman knows that times are tough in St. Louis. He needs only look at the unemployment reports, which show the unemployment rate in the St. Louis area at a far too high 8.6 percent.
This rate makes this a very different type of recession in St. Louis. Usually, the Missouri city's unemployment rate ranks below the national rate during bad economic times. This time, though, the rate is slightly higher than the national unemployment numbers.
"Like every other community out there, we are seeing a good amount of unemployment," said Chapman, principal with Clayco Real Estate Services in St. Louis. "We've seen a lot of losses in the manufacturing component in the city. That has thrown us out of balance with the rest of the nation a little bit."
The good news is that St. Louis boasts a diverse variety of developers. The city attracts both smaller, local operators, big national operators and everyone in between. And these developers work on projects that range from tiny strip malls to massive industrial parks.
The hope from Chapman and other St. Louis commercial professionals, then, is that this mix will be strong enough to carry the Missouri city through the worst recession many commercial brokers have ever seen.
The fate of St. Louis' office market tells the story: According to Marcus & Millichap's research division, developers are projected to deliver 190,000 square feet of office space in the St. Louis metro area in 2009. That's down significantly from the 926,000 square feet developers brought to the market in 2008.
Office vacancy rates in the St. Louis metro area are expected to end 2009 at 17.4 percent, a 190 basis point increase from one year earlier. Not surprisingly, as vacancies increase, asking rents will dip. Marcus & Millichap says that rents will fall 4.2 percent to $19.52 a square foot. Effective rents are forecast to decline 5.1 percent to $15.67 a square foot.
The numbers are equally as gloomy on the retail side. Marcus & Millichap predicts that deliveries will actually increase this year thanks to the scheduled completion of several projects that broke ground before the downturn. In all, developers are scheduled to add 1.4 million square feet of retail space in 2009, after bringing 825,000 square feet last year.
The problem comes with an increased vacancy rate. The higher number of deliveries and a slowdown in tenant demand are forecast to increase retail vacancy rates throughout St. Louis by 260 basis points to 12.1 percent in 2009. Last year, retail vacancies rose by just 30 basis points, according to Marcus & Millichap.
Rents will be lower, too. Marcus & Millichap predicts that asking rents will end 2009 at $14.60 a square foot, a dip of 3.1 percent from one year earlier. Effective rents are forecast to fall 3.8 percent to $12.49 a square foot. These will mark the lowest average rental rates in St. Louis in nearly 10 years.
These numbers certainly don't paint a pretty picture. Chapman has certainly seen the impact of the recession in the St. Louis market.
"There is a lot of interest in building, there just isn't as much actually pulling off the trigger going on," he said. "With the exception of institutional projects, like universities and public entities, and healthcare projects, we just aren't seeing much building going on."
The St. Louis area has seen the construction, now complete, of the new St. Clare Hospital in nearby Fenton. And that's just one of many medical projects either underway or planned for the St. Louis area. Like most cities these days, St. Louis is relying on the healthcare industry to help it get through the economic downturn.
Clayco, for instance, is currently building a $150-million headquarters for Centene Corporation, a large healthcare company that is relocating to nearby Clayton, Mo. That project is currently under construction, and, when complete, will cover 477,000 square feet and include a 952-car garage.
"This is a great time for healthcare construction," Chapman said.
In fact, Chapman added, for construction companies that can build now, this is a good market to find inexpensive labor and to put up buildings at lower costs.
"If you can afford to build now, and if you can get the financing or you have the money to do it yourself, you can build pretty economically," Chapman said. "It's as affordable to build now as I've seen it in the last five or six years."
Clayco is surviving the recession by relying on a host of different business arms. Chapman said Clayco's real estate company will not have as good a year as it typically has thanks to the recession. However, Clayco's construction company, by focusing on institutional projects that are being funded through either public/private partnerships or quasi-public entities, is having a solid year.
Mike Hejna, president of chief executive officer of Gundaker Commercial Group in Chesterfield, Mo., said that St. Louis is actually faring better during the downturn than are many other markets, both nationally and in the Midwest.
Hejna points to the diverse nature of the St. Louis market, a diversity that has acted as a hedge against the most severe swings of vacancy levels. Simply put, St. Louis is not a boom-or-bust type of market, he said.
"From a myopic perspective, when you are in the middle of a fire, you always think it's hotter where you are than it is anyplace else," Hejna said. "From a myopic standpoint, then, I look at the St. Louis commercial real estate market and see that it continues to be somewhat volatile. But when looking at the market in a comparative way, St. Louis continues to be a very well-diversified marketplace. Because of that, it has not seen the severe ups and downs that other markets see."
This doesn't mean, of course, that St. Louis doesn't have its own serious issues these days. Hejna said that land is not selling well at all right now. The lack of capital to fund land development has created very severe constraints in the St. Louis metro area, he said.
Retail is also struggling, he said. Consumer consumption in the region is down, Hejna said. This means that retailers are considering little or no expansion. Retail vacancies continue to climb.
Office and industrial are more stable, but are also experiencing pressure thanks to the terrible economy, Hejna said. As unemployment rises, less vacant office space is absorbed, he said. Landlords in both the industrial and office sectors continue to hear requests from tenants for rent concessions, he said.
The bright spot? Multi-family, which, as the single-family housing market continues to struggle, has been holding steady during the downturn, Hejna said.
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