Piers Pritchard

Like most Midwest cities, St. Louis suffered through its share of pain during the Great Recession and its painfully slow recovery. Today, though, the city appears to be on the rebound. And that includes its commercial real estate market. Midwest Real Estate News recently spoke with Piers Pritchard, a vice president and principal at the St. Louis office of Cassidy Turley. Pritchard had plenty of positive news to share regarding this Midwest city’s commercial real estate market.

Midwest Real Estate News: This is a pretty broad question, but are you seeing things getting better in the commercial real estate market these days in St. Louis?
Piers Pritchard: Yes. We saw some good momentum at the end of 2011. In the second half of this year, that momentum has continued. Some of the good news comes from our local companies. We have several local companies, from recent start-ups to our Fortune 500 companies, who are adding jobs and committing to additional space. These companies are furthering their commitment to the St. Louis metro area.

MWREN: It’s good to see that commitment from local companies.
Pritchard: It is. We won’t see that absorption until 2012. That’s when we’ll see the space actually being occupied. But we are seeing good momentum in St. Louis right now. The total square footage that those tenants are looking for is 11 percent more space than they currently occupy. That’s a good formula. We are feeling good and optimistic about 2012.

MWREN: Why do you think you’re seeing these improvements now.
Pritchard: I think St. Louis is a pretty fundamentally sound city. We do not have the boom/bust of the bigger cities on the coasts. We don’t’ see the highest of highs or the lowest of lows. When we are seeing a recovery, as we are now across the country, St. Louis is almost always positioned well to recover because we don’t have the big swings like some of the bigger cities. We also have a good foundation of corporate citizens. Some of our largest employers are adding jobs and more space.

MWREN: What commercial sectors are performing better than others?
Pritchard: The big thing everyone is talking about is healthcare. St Louis is actually pretty heavy on healthcare. That’s a good thing from our perspective. It’s one of those segments that hasn’t slowed during the recession. We’ve seen growth. We think that will accelerate.

MWREN: What other property types are doing well right now?
Pritchard: Some property types seem to be in the last stages of the downfall. Others seem to be in the first stages of recovery. Industrial has seen the most significant recovery so far. The St. Louis area has seen a couple of large deals. Walgreen’s occupied 500,000 square feet last year. Procter & Gamble expanded in the area. There has also been a strong demand for rental units. It’s hard to purchase a home because of stricter lending standards. The multi-family market coast to coast is doing well. That is the case here in St. Louis as well.

MWREN: Multi-family seems to be doing well in all the Midwest markets that we cover.
Pritchard: From an investment perspective, there are two product types doing well now. One is core, well-leased, good-credit-tenant big retail projects that are grocery anchored. Big retail centers of that kind are doing well. And the multi-family segment is also doing well.

MWREN: What about retail? How is that segment performing today?
Pritchard: Retail is slow and steady. We have optimism going forward. What we’ve seen in the last couple of years has been a flight to quality from lesser B- and C-class properties to Class-A properties on the retail side. Those B and C type properties have been vacated or have been converted to different types of uses. An old retail center could become a church or a school or very inexpensive office space. The owners of lesser-quality retail space have had to be creative in attracting tenants, in recouping that income from tenants that have vacated.

MWREN: Since the start of the recession, we’ve seen plenty of these creative re-uses across the Midwest.
Pritchard: It is a trend that we have seen. And it’s not just on retail. You’ll also see light industrial, flex spaces and office/warehouse spaces that may have had more of a typical type of use that are now being converted into something different. From a landlord’s perspective, they just want their space leased.

MWREN: Looking ahead, what do you see occurring in the world that might actually derail the recoveries we are seeing in most Midwest markets?
Pritchard: Everyone is still on edge. We are still optimistic and we do believe that the momentum we’ve seen can carry us in the right direction. But recent history has everyone a little nervous. Everyone is very cautious in their optimism. We have political issues and the presidential election in November to worry about. There are a lot of things that are teetering in Washington. Who will be president is one of them. This could all have an impact on what happens nationally.

MWREN: Do you think the recovery in St. Louis will continue in 2012 and beyond?
Pritchard: Our economy here is pretty diverse. We are not completely dependent on any one industry. Healthcare is a growing trend in St. Louis, but we are not completely dependent on healthcare. We have manufacturing. We have IT companies here. We have a strong market with lawyers and accountants and other professionals. We are not dependent on one segment of the market. That will help our recovery. We are all about slow and steady. St. Louis is about not hitting the high highs or low lows.

In the report, Cassidy Turley’s Chief Economist Kevin Thorpe discusses the stats. A few key highlights discussed in the document include:

• The U.S. industrial sector had a robust 2011, and ended the year with momentum. Demand for industrial space registered 97.6 million square feet in 2011 – a level of absorption that rivals pre-recession levels recorded in 2005 and 2006.

•  The key sectors that drove demand last year were motor vehicles and parts (particularly in the second half of the year), clothing and accessories, semiconductor manufacturing, and food and other commodity-based products. Industrial markets, specifically port cities and distribution center hubs, also benefited from a surge in exports, which increased 17 percent in 2011 to $183.8 billion. In addition, 2011 was the second best year on record for U.S. exports.

•  In 2011, 59 out of the 67 markets tracked recorded positive demand for warehouse space. The top ten performers were: Dallas (10.9 million square feet); Phoenix (7.8 million square feet); Detroit (5.7 million square feet); Indianapolis (5.4 million square feet); Atlanta (5.4 million square feet); Nashville (4.0 million square feet); Houston (3.6 million square feet); Central New Jersey (3.5 million square feet); Chicago (3.3 million square feet); and Milwaukee (3.1 million square feet).

• The momentum was evident in the fourth quarter of 2011. Net demand finished the year at 27 million square feet, up from 23.6 million square feet from the previous quarter. The U.S. industrial vacancy rate inched down 10 basis points in the fourth quarter from the previous quarter to 9.1 percent. Vacancy is currently 80 basis points below its peak of 9.9 percent registered in the second quarter of 2010. After rising for two straight quarters, average asking rents slipped to $5.05 from $5.11 NNN. In the development pipeline, there were just 19.9 million square feet under construction as the quarter came to a close – extremely lean for a market that typically delivers an average of 72 million square feet per year.

By all accounts, the commercial real estate markets across the Midwest should be healthier this year.

The latest report confirming this comes from Cassidy Turley, which earlier this month hosted its State of Real Estate event at Clowes Memorial Hall on the campus of Butler University in Indianapolis.

Jeffrey Henry, regional managing principal with Cassidy Turley, said that Indiana’s commercial real estate market seems poised for a solid 2012.

“Although the many national and international challenges of the past year hampered growth, Indiana’s commercial property markets proved to be remarkably resilient as every segment of commercial real estate demonstrated strengthening fundamentals,” Henry said of the market’s performance last year.

Cassidy Turley research director Jason Tolliver brought good news, too.

“Commercial real estate is improving,” Tollivers said. “The economy has made the difficult transition to a private-sector-led recovery, hiring is up in the demand drivers of commercial real estate, the manufacturing sector is expanding and retail sales have recovered from their bottom.”

Segments experiencing positive growth trends over consecutive quarters were multi-family (10 quarters), industrial (five quarters), and office (three quarters).  Even the retail segment is now trending positive. Vacancy rates are decreasing in many of these markets, rent rates are stabilizing and some new development is occurring in multi-family .

To access the entire Cassidy Turley Indianapolis, Indiana 2012 Annual Market Report visit www.cassidyturleyreport.com.

“I am humbled to serve the Society as president in the coming year and to be chosen by my peers. I look forward to enhancing the SIOR designation during my term,” says Poynter of his newly elected position.

Poynter has achieved the two highest designations in his field, SIOR and Certified Commercial Investment Member. He is one of a small number of real etate practitioners across the globe to hold dual designations.

Cassidy Turley’s Minneapolis team has been retained to manage the two-building 491,000-square-foot Class-A office complex. The 1550 (known as the MoneyGram Tower) and 1600 Towers were built in 1987 and 2000 respectively by Duke Realty Corporation, and are directly adjacent to its West End retail development.

“We are excited to have been selected by Equity Office Properties to manage this Class-A project in the Twin Cities,” said Dennis Panzer, managing principal of the Cassidy Turley Minneapolis office. “Our team of experts in property management is working to provide a seamless transition for the portfolio.  This assignment is a demonstration that our national business strategies are indeed proving valuable.  This assignment constitutes repeat business and was procured through relationships in our Columbus and Dallas markets.”

The team focused on this new assignment will be led by Dawn Grant, senior vice president of operations and a principal with the firm. Paul Skram will serve as senior property manager, having more than 25 years experience in property and facilities management. He most recently managed One Financial Plaza in downtown Minneapolis and the Woodbury Lifestyle Center in the east metro. Paul Doering, who has been with Cassidy Turley for more than 20 years, has been tapped as lead operating engineer.

Rotating Equipment Repair, a company that performs pump repair for power generation, purchased the 18,000-square-foot industrial facility located in the Sussex Corporate Park in Sussex, Wis., from Venture Capital Investments LLC.  Rotating Equipment Repair will use the property as an additional facility to complement its expanding business.  David Barry and Jim Young, both of Cassidy Turley Barry, brokered the transaction.

“TriStar Tool recently went out of business and the property went into receivership.  We were able to complete the sale immediately after the property formally came on the market,” said Barry of the transaction.

In a separate transaction, Young represented Universal Metrics, Inc. in its purchase of the 38,700-square-foot industrial crane facility located in Richfield, Wis.  Universal Metrics, a Menomonee Falls, Wis.-based supplier of steel and stainless steel fabrications, machined components, metric hardware and specialty warehousing services, will expand its capacity with the addition of this building.  The company currently operates out of three other locations in Southeast Wisconsin, all of which will remain in full operation.

Anthony Huenerbein and Brian Parrish of The Dickman Co., Inc. represented the seller, TVT, LLC in the transaction.  The property formerly housed the operations of Victory Steel, which closed early this year.

“The Richfield building offered multiple bridge and jib cranes, expansion room and good freeway access, which made it very appealing to Universal Metrics as a specialty fabrication plant,” said Young.  “Both transactions represent a continued positive trend in the industrial real estate market.”

Jeffrey Bender

Jeffrey Bender, executive managing director and principal with the Cincinnati office of Cassidy Turley, has some good news: Larger-scale deals are returning to the Cincinnati market.  Bender explains why in this guest column for Midwest Real Estate News.

 Guest column by Jeffrey Bender, SIOR, CCIM

The overall vacancy rate for the Cincinnati industrial market crept downward from 10.36 percent in the previous quarter to 9.98 percent, with all four quadrants experiencing a downward trend in their vacancy rates from the previous quarter. Leasing activity along the Interstate-75 corridor led to declines in the vacancy rates for bulk buildings in the Northwest and Northern Kentucky quadrants.

A continuing positive sign was the Cincinnati Purchasing Managers Index of 61.0 in September, up from 59.3 reported in August by the Cincinnati Report on Business from the Institute for Supply Management – Cincinnati and the University of Cincinnati Economics Center. Indexes that are higher than 50 indicate that a region’s manufacturing activity is expanding, and the Cincinnati region has maintained an index above 50 for more than 21 months. More good news came from the U.S. Bureau of Labor Statistics, with the Cincinnati MSA ranking fifth in the United States in the number of manufacturing jobs gained (5,100) in one year since August, 2010.

The third quarter saw the return of large new lease transactions, with eight above 100,000 square feet. Swimoutlet.com’s 390,000-square-foot lease in the Port Union Commerce Park – East bulk building in West Chester was the largest since the second quarter of 2010. Other major transaction included:

• Schwarz Paper’s renewal of 300,000 square feet with Prologis in Hebron, KY
• Global Scrap Managements lease of 300,000 square feet from Industrial Realty Group in Batavia, Ohio
• Duke’s lease of 166,000 square feet to Southwest Stainless Steel in West Chester, Ohio
• Wayfair’s lease of 150,000 square feet in Hebron, Ken.
• Owens & Minor’s renewal of 150,000 square feet with DCT in Hebron, Ken.
• Johnson Control’s expansion of 135,000 square feet in Florence, Ken.

Both Clarion Partners and Exeter Property Group executed industrial portfolio purchases that included properties in the Cincinnati market.  Timing in the market has spurred both buyers and sellers. Inland American recently put the 970,000-square-foot bulk building in West Chester occupied by Cornerstone on the market for $55 million.

There were a few large “occupier” sales also such as:

• Rhinestahl Tool and Die’s purchase of 120,000 square feet in Mason, Ohio
• Frutarom USA’s purchase of 113,000 square feet on Duff Drive in West Chester, Ohio

Regarding new supply, IDI started to move dirt on a 550,000-square-foot speculative building in its Monroe Logistics Center in Monroe, Ohio. This is the first bulk building to break ground since 2009 when a 721,000-square-foot building was completed in the same industrial park. Verst Group Logistics broke ground in July on a 200,000-square-foot expansion that would double the size of its bulk facility on Gateway Boulevard in Hebron, Ken.  And, more than 1 million square feet will soon return to the Northwest quadrant when Dell/Ceva Logistics closes its 428,000-square-foot facility on Windisch Road at the end of this year and Liz Claiborne vacates its 600,000-square-foot building on Jacquemin Drive in 2012. The Jim Beam plant on Paddock Road will close at the end of the year, adding 278,000 square feet of vacant space to the Central quadrant.

The newest industrial park in the region, Sharonville Commerce Center, one of the more successful land development sites during the recent recession and located near Interstate-275 and Commerce Boulevard, is adding two more facilities, a 127,000-square-foot building for USUI International Corp. and a 28,000-square-foot project for Gem City Tire.  Kanefusa, Japan’s largest manufacturer of high quality industrial tools, has commenced site work on its new 25,000-square-foot build-to-suit near the Cincinnati/Northern Kentucky Airport.

While the decreasing vacancy rate is positive news, the additional inventory both from a few large buildings closing operations and the first speculative building in a few years is also needed.  Many of the larger Class-A modern bulk distribution centers have landed tenants, albeit at Class-C pricing.  In any recovery, it is very typical that the product leased or sold occurs in order of most attractive to least attractive (not just in terms of aesthetics but function).

So, Phase I of the recovery has already occurred.  Phase II will see Class-B product leasing also at Class-C type rates, although certain areas or buildings will be able to begin holding firm due to a lack of alternatives available.  Finally, the Class-C product will begin to be absorbed.  It is not expected that this product will be hit as hard on lease rates, as a lack of supply and alternate product will put upward pressure on rates.  Phase II will occur throughout the first three quarters of 2012, with Phase III immediately following.

New construction, while soft in 2011, is expected to remain depressed through 2012 with no substantial recovery occurring until 2013.

Forecast

• Economic growth should continue for the region. The pace, however, will be sluggish as companies remain financially cautious and job growth remains soft.
• The lack of “new-to-the-market” tenants will keep landlords scrambling for the local credit-worthy tenants.
• The Northern Kentucky and Northwest quadrants are expected to lead the region in recovery because of their strategic locations along the Interstate-75 North-South transportation corridor.
• Land prices are as low as witnessed in the past 20 years, so if you are considering constructing a new building in the future, buy now.
• Investment interest will remain stable as pricing in Tier-1 markets has already pushed many investors in search of higher returns here and to other Tier-2 cities like Greater Cincinnati/Northern Kentucky.

Jeffrey Bender is the executive managing director and principal in Cassidy Turley’s Cincinnati office. You can reach him at 513-763-3046 or by e-mail at Jeffrey.bender@cassidyturley.com.

Artos Engineering had also purchased the 25,600-square-foot flex building next to the vacant site in 2008 from Weather-Tek, a purchase that included an option to obtain the land at a later date.

“They took advantage of improving business conditions and low interest rates to purchase land for expansion,” said Jim Young of Milwaukee-based Cassidy Turley Barry, who was the listing broker on both transactions.

Jeff Hoffman of Judson and Associates represented the buyer in both transactions.

A CCIM is a recognized expert in the commercial and investment real estate industry, and is part of a global commercial real estate network with members across North America and more than 30 countries.

McGrath is an associate vice president with Cassidy Turley’s Columbus office, where he has been a member of the industrial team for nearly five years. He represents owners and tenants of industrial real estate throughout Central Ohio. In 2009, he was named Columbus Board of Realtors Rookie of the Year.

James Young of Milwaukee-based Cassidy Turley Barry represented Ludman Industries in the transaction, while Sam Dickman, Jr. of The Dickman Co. represented the landlord, Hampton 4800 LLC.

“The new facility has multiple large-capacity cranes that are vital to the continued growth of Ludman’s business operations,” said Young. “In addition, it is another positive sign that manufacturing and the Milwaukee industrial market are continuing to rebound.”

Ludman is relocating from an about 18,000-square-foot crane facility in Muskego, Wis., which Young is currently marketing for sale or lease.