After suffering through a decade of defense industry cutbacks, St. Louis rebounds with a diversified economy and healthy real estate markets.

The addition of more than 100,000 jobs to the St. Louis area in recent years has been a boon for the local economy. Flat job growth in the late 1980s and early 1990s prompted the St. Louis region to embark on an aggressive economic development campaign to retain existing industry and attract new businesses. The goal was to add 100,000 jobs during a six-year period beginning in January 1995 and extending through 2000. As of July, the metro area had surpassed its goal with the addition of 105,000 new jobs.

Employment growth has sparked a significant turnaround in an area that experienced tremendous defense sector attrition during the late 1980s. "That represents a big shift that has now created some of its own momentum," says Richard Fleming, president and CEO of the Regional Chamber and Growth Association (RCGA) in St. Louis. "We think that has awoken the sleeping giant of this region's economy after a long dry spell."

And St. Louis isn't about to rest on its laurels. The RCGA plans to build on the strength of its employment campaign by launching another aggressive economic development initiative aimed at fortifying key industries. "One of the core agendas from here is to identify industry clusters in which we would focus on being best of class," Fleming says.

The RCGA plans to target three to five industry clusters. So far, potential candidates include plant and life sciences, information technology, advanced manufacturing, transportation and distribution, and financial services/headquarters. The objective is to grow industries that already have a strong base in St. Louis. For example, the metro area is home to 1,200 plant and life sciences companies and 2,400 information technology companies.

The region's continued efforts to diversify and strengthen the economy bode well for all real estate sectors. "The market over the past two years has been as strong as I've ever seen it," says Kevin Lasater, a senior vice president at St. Louis-based McCarthy Building Cos. Local and national firms are fueling the economic expansion. MasterCard International, Savvis, World Wide Technology and G.A. Sullivan are some of the firms consuming space.

Office growth continues "Over the past three years, the market has gotten better and better and better," says Ramsey Maune, a senior vice president in the St. Louis office of Indianapolis-based Duke-Weeks Realty Corp. "But now I think it has plateaued. The rate of growth has evened out."

Second-quarter vacancies averaged 8.4% in a market that spans 40.9 million sq. ft., according to St. Louis-based Colliers Turley Martin Tucker.

"We see a calming of the market. The market is still very good, but compared to one year ago, it is not as robust," agrees Burt Follman, chairman and CEO of St. Louis-based Follman Properties - ONCOR International. In addition, consolidation and merger and acquisition activity have brought some space back to the market. "We think some of that sublease space is going to be competitive with regular space," Follman says.

So far, demand for office space in the St. Louis metro area has kept up with the rapidly growing supply. As in 1999, the majority of this year's new construction is build-to-suit, while many spec buildings have been leasing to single tenants prior to completion. In the first six months of 2000, the 95,000 sq. ft. West Port Place leased to Primary Network; the 148,000 sq. ft. Corporate Woods III in Earth City leased to Southwestern Bell; and the 215,000 sq. ft. Maryville 700 in Chesterfield leased to Edward Jones.

Most of the new construction is in west St. Louis County. West County construction included the 117,000 sq. ft. Timberlake III, which was 30% leased at mid-year, and two Class-B office buildings on Interstate 170 totaling 189,000 sq. ft.

Clayton has three new buildings under development totaling 816,000 sq. ft. New projects include the 270,000 sq. ft. Shaw Park Plaza and the 246,000 sq. ft. Forsythe Centre, which are both slated for completion in fourth quarter 2000 and first quarter 2001, respectively. The 300,000 sq. ft. Plaza in Clayton will be completed in third quarter 2001. While that market is a hot spot, there is some concern that the volume of new space will create a little softening in the Clayton market, Follman says.

Overall, suburban vacancies are expected to remain steady largely due to build-to-suit projects. MCI Worldcom, for example, will occupy a 385,000 sq. ft. building in St. Charles County. The overall suburban vacancy rate was 7.3% at mid-year, according to Colliers Turley Martin Tucker.

Highway 40 corridor growing One of the strongest areas of development is the U.S. Highway 40/Interstate 64 corridor that starts in downtown and ends at WingHaven in far west St. Charles County. The corridor has become a high-tech office district with new additions that include MCI Worldcom and a 550,000 sq. ft. campus for MasterCard International.

"We're seeing a great deal of growth in technology," Follman says. The St. Louis region has attracted a significant amount of venture capital in recent years. In the second quarter alone, companies in the St. Louis region received $311 million in venture capital compared with the $242 million invested in all of 1999, Follman notes.

Other technology related businesses and enterprises along this corridor include Energizer Battery, A.G. Edwards, Edward Jones, Monsanto, Solutia and Charter Communications, as well as St. Louis and Washington universities. Virtually all of the buildable sites are now developed, and it has been highly successful, Follman says of the area. Follman Properties recently represented Energizer in relocating its headquarters from downtown to the Maryville Center office park.

Maryville Center is Duke's largest development in the St. Louis market. Duke-Weeks is currently building 533 Maryville Center Drive, a 125,000 sq. ft., six-story office building that is 100% leased to Energizer. The building is slated for completion in December. Duke-Weeks also has broken ground on the 125,000 sq. ft. 555 Maryville Center Drive. Energizer has preleased about 40% of the building, which is slated for a June 2001 completion. Duke-Weeks also expects to start construction this spring on the 80,000 sq. ft. 825 Maryville Center Drive building on a spec basis.

Industrial market tight The St. Louis industrial market did slow in late 1999, but activity picked up after the Y2K fears passed in early 2000. "It seems like people are once again making capital investments in new facilities and are making long-term decisions," Maune says.

Heightened leasing has pushed absorption well ahead of 1999's pace. Through mid-year, St. Louis absorbed four times as much industrial space as the same period in 1999, with total absorption reaching 1.8 million sq. ft. in St. Louis' 205 million sq. ft. industrial market. Mid-year vacancies reached 2.8% overall and 2.6% in bulk space, according to Colliers Turley Martin Tucker.

"One reason vacancies are so low is because the St. Louis industrial market is characterized by a lot of companies that own their own facilities," Maune says. The large base of owner-occupied facilities tends to lower vacancy rates in multi-tenant space. In addition, St. Louis is typically a market with little overbuilding, he adds.

Industrial parks in Earth City and Riverport continue to attract much of the build-to-suit activity. "Earth City is really St. Louis' premier distribution park because of the location along I-70 and I-270," Maune says.

One Duke-Weeks project under way in Earth City is DukePort IX, a 350,000 sq. ft. distribution center. Duke-Weeks also is developing a 72,000 sq. ft. service center in Earth City. The spec project has experienced 20% preleasing since construction started in June. "We've had great success. All of our spec buildings have reached 100% occupancy within six months of completion," Maune says.

The three primary categories in the St. Louis industrial market are bulk, flex and service center facilities. "We've been developing all three of those product types, but the strongest market seems to be with service center and bulk space," Maune says.

The lion's share of this year's absorption occurred in the bulk sector, with about 1.35 million sq. ft. absorbed. Flex buildings accounted for about 60% of construction activity in 2000.

Meanwhile, demand surges for service centers, which typically feature 80% to 90% office finish. "It's a more economical office solution for a lot of companies that need only a little bit of distribution space," Follman says.

Steady retail growth Retail occupancies in the St. Louis metro area are averaging about 92%. "I think it's a strong and healthy market," says Jim Sansone, a principal with the St. Louis-based Sansone Group. "The Midwest follows a trend differently than the coasts in that there are not the same highs and lows," Sansone says.

Big-box users and grocers are driving much of the retail development, with Target and Wal-Mart leading the way. However, development is becoming increasingly difficult due to lack of available land, which spurs redevelopment. "Areas that wouldn't have been considered for development in the past five to 10 years are now being considered," Sansone says.

In 1998, the Sansone Group opened The Promenade, a 300,000 sq. ft. retail project located in the inner-belt community of Brentwood. The project involved the acquisition and demolition of 150 homes to assemble the site. The success of that project has sparked additional redevelopment projects in the same area, Sansone notes.

East of The Promenade, Dierbergs Market will anchor the 171,000 sq. ft. Dierbergs Brentwood Pointe project, which is currently under construction. In addition, the city of Brentwood recently issued a request for proposals for a redevelopment site just to the east of Brentwood Pointe.

"Infill projects are doing very well," says Scott Saunders, an assistant vice president at Colliers Turley Martin Tucker. However, emerging markets such as Chesterfield Valley also are ripe for new development. One new project is the 1 million sq. ft. Chesterfield Commons that features anchors such as Wal-Mart, Lowe's, PetsMart, Sam's Club and Office Max.

Developers are pushing further into suburban markets in search of new opportunities, agrees Sansone. The Sansone Group acquired 40 acres in southwest Jefferson County to build the 300,000 sq. ft. Jefferson County Plaza. Target and Home Depot both opened at the plaza this spring, while additional in-line space and pad-site stores still are under construction.

Multifamily on even keel Conditions in the multifamily market parallel 1999, notes Kenneth Aston Jr., president of Apartment Investment Advisors Ltd. in St. Louis. "The rest of 2000 and 2001 will be good. We predict high, stable occupancy rates and heavy investor demand for product," Aston says. Occupancies in all apartment sectors average about 95%, according to Apartment Investment Advisors.

Significant sales this year include the 280-unit Regency Park, formerly Manchester Commons, in west St. Louis County. Dallas-based Basic Capital sold the property to Village Green Cos. of Farmington Hills, Mich., for $13 million.

The 256-unit Heatherton Apartments in north St. Louis County sold for $8.3 million. Chicago-based TVO Realty Partners purchased the property from a private seller.

Significant new developments include The Enclave at WingHaven in St. Charles. Houston-based Bomasada is developing the 400-unit luxury property, which is a mixed-use, master-planned community anchored by MasterCard International.

A key downtown deal is the 270-unit apartment development planned by Dallas-based Lincoln Property Co. Marking downtown St. Louis' first conventional apartment development in decades, the apartments will be located on historic Laclede's Landing directly on the riverfront.

Construction is well under way on the $145 million Plaza in Clayton at the corner of Hanley Road and Carondelet. As well as 80 luxury condominiums, the 1.2 million sq. ft. mixed-use project features a 341,000 sq. ft. office building, 22,000 sq. ft. of retail space and an underground parking structure for 1,271 vehicles.

Hotel building boom St. Louis is experiencing an unprecedented hotel development boom. Five new downtown hotels are in the works, including a 1,000-room Marriott Renaissance convention headquarters, a 257-room Westin, a 300-room Sheraton and a 368-room Drury Plaza. By 2002, downtown St. Louis will offer 7,400 hotel rooms, according to the St. Louis Convention & Visitors Commission.

All of the new downtown properties also involve historic renovation. The $244 million Marriott Renaissance project, for example, builds on the historic Gateway and Lennox hotels. The 165-unit Renaissance Suites will open in October 2001, while the 916-room Marriott Renaissance Hotel is scheduled to open in August 2002.

The Missouri Legislature recently passed a tax-credit bill that allows developers to access both federal and state tax credits for refurbishing historic properties. The new legislation enables redevelopment in St. Louis' historic areas, says Bob Bedell, president & CEO of the St. Louis Convention & Visitors Commission.

Construction also has sparked renovation and expansion projects as existing hotels battle new competition. For example, the downtown 297-unit Embassy Suites plans to unveil a $4.4 million renovation in October.

Through mid-year, average daily occupancy was 60.8%, down 0.7% from the previous year, while average revenue per room for the same period increased 1.9% to $69.82, according to Hendersonville, Tenn.-based Smith Travel Research.

"I think the occupancy and the average rates in the city of St. Louis and St. Louis County are a lot healthier than the metro area numbers," Bedell says. About 3,500 rooms on the Illinois side of the Mississippi River in East St. Louis are included in the Smith Travel Research study. The lower rates and occupancies among those properties have weighed down the overall averages, he adds. "The pure occupancy of St. Louis city and county is probably closer to the mid- to high-60s (percentile) for occupancies, and average rates are probably closer to $85," Bedell says.

The demand for hotel rooms is driven in part by an active group travel market. Group travel accounts for about 37% of the hotel business metro-wide and 50% of the downtown hotel business, Bedell notes.

St. Louis has become an increasingly popular group travel destination for both business and pleasure travelers. In 2000, St. Louis was expected to host 400 convention and trade show groups, generating demand for about 500,000 room nights. In addition, about 2,200 tour groups visit the St. Louis area each year, generating about 110,000 hotel room nights, according to the St. Louis Convention & Visitors Commission.

Strong demand continues to fuel new development in the hotel industry, and other real estate sectors are enjoying much the same experience. Overall, the St. Louis market continues to maintain impressive growth across all real estate sectors. Two years ago, some industry observers were concerned that the market was facing too much of a good thing - an active development cycle that would lead to an unwelcome spike in vacancies.

But demand for space has remained high among new and growing companies as St. Louis marks its ninth year of continued economic expansion. That strong demand continues to keep the supply of space in check in the face of ongoing development. "Right now, the market from a construction standpoint has been extremely busy, and we expect that to continue for another 12 to 18 months," Lasater says.