As the St. Louis market continues its long climb up the hill to recovery, this year's market reports are the most positive in recent memory. Vacant space is doing a disappearing act in most segments with only downtown offices dogged with empty spaces. Speculative development is still a ways off, but it is no longer an unmentionable. The industrial and retail segments are providing the lion's share of construction activity with build-to-suit the preferred mode.

The St. Louis area has several projects which are helping to draw new construction to the area, says Mike McCarthy, Chairman of McCarthy, a national construction firm based in St. Louis. "St. Louis' below-average cost of living and above-average spending power position the region to be a desirable location for headquarter operations. Further inducements include the new Metro Link light rail system connecting downtown to the airport and an NFL football team," McCarthy says. "Several new casino projects in planning, a new domed stadium for the Rams football team and major retrofitting projects at three local auto plants have also been a boost to the St. Louis construction market."

The Regional Commerce and Growth Association (RCGA) is set to launch a $10 million economic development campaign. One of the campaign's goals is to generate 100,000 new jobs in the region over the next five years.

Dick Fleming, RCGA president, says the association's effort has two categories. "First and foremost, we're trying to bring the region together to act as a region as opposed to the fragmentation which has been historically prevalent. Cornerstone for the whole campaign is a one-stop shop concept for development that basically says that we will market and sell the region without regard to where the jobs go within the region."

A new player in the St. Louis market is Duke Realty of Indianapolis. The firm purchased 100 acres of land in Earth City business park and three suburban office buildings from Citicorp. Local realty observers expect Duke to make a major impact on the St. Louis market.

"Before the end of 1996, you will see some new suburban office projects started," says Robert G. Clark, president of Clayco Construction Co. Inc "These will be single-user buildings with a small amount of speculative space. They'll total 300,000 or so sq. ft. Either Duke will start an office project or a local developer will step up to the plate to beat Duke to the punch. Overall, the fact that Duke is opening an office here has significant positive implications for the entire commercial market."

With optimism abounding and memories of the difficult years in the late-1980s and early-1990s fading fast, Terry Dunaway, senior vice president at the St. Louis office of GMAC Commercial Mortgage, wonders if prudence and self-discipline will override the optimism and "can-do" attitudes that are rising in the real estate community.

Office

The office market is "gangbusters," says David Thiemann, managing director of the St. Louis office of Trammell Crow Co.

"We're seeing rates go north of $20 per sq. ft. while tenant improvements go down, sometimes below $10 per sq. ft. We're seeing 15% to 25% net increases in suburban rents." Along with these rate increases, Thiemann notes that good, positive absorption continues.

McCarthy points out that office vacancies dropped nearly 3% in 1994, "which should mean future possibilities for new office construction as tenants compete for the few prime spaces available."

In Clayton, Thiemann says that when current lease negotiations likely to be closed are signed, the largest Class-a space available will be 25,000 sq. ft., the next biggest is 9,000 sq. ft. He notes that there is one big block of space in west St. Louis County, but this is expected to be rented soon.

"The real story of the office market is that we are crossing the $20 a sq. ft. threshold and are finally back to pro formas we did in the '80s," Thiemann says. However, he adds, rents are maybe a dollar shy at most of the level needed before there will be much serious talk about new construction.

Gregory J. Nooney Jr., chairman of Nooney Krombach, says downtown and north St. Louis County office rates have been essentially static over the last year. "While the low and high points of the rental rate ranges have not necessarily changed, the asking rates in many of the Class-a signature or trophy class buildings have increased by as much as $2 per sq. ft. within the range."

The greatest rate increases in the suburbs have been realized in the West and South County submarkets with rents up from a minimum of $0.75 per sq. ft. to as much as $3 per sq. ft. compared with a year ago, Nooney says.

Colliers Turley Martin's office report shows overall office vacancy in metro St. Louis at 14.5% but when only Class-a offices are considered this falls to 8.7%. Downtown's Class-A vacancy, which began the year at 11. 1%, rose to 13.3 % by midyear, reports Keith Zeff, Turley Martin vice president of informational services. However, Zeff anticipates positive absorption for downtown Class-A buildings in the second half of the year.

The suburban office market, led by west St. Louis County turned in a strong performance in the second quarter of 1995, Zeff says. That submarket at mid-year had a vacancy of only 4.9% in the Class-A category, according to the Turley Martin report. Overall St. Louis County office vacancies amounted to 8.1% with Class-A at 6.4%

Downtown offers the only viable office market in the metro area with enough space to meet any tenant's requirement, according to Adele Schenberg, vice president at Follman Properties * Oncor International. She calls the downtown market still "somewhat soft." Even though some of the Class-A buildings are pretty well leased, there remains enough space for the average tenant, "Although we are starting to see a decline in the availability of large chunks of space," Schenberg says. However, she doesn't anticipate seeing 95% occupancy in downtown for a long time.

Downtown rates are firming up a little, but not as much as in the county, Schenberg says. Concessions are still being made for qualified tenants in that market. She places effective Class-A rates downtown at $13.50 per sq. ft. to $17 per sq. ft.

Most downtown tenants are coming from a combination of some upgrading and internal growth, Schenberg says. "We still don't see a lot of companies coming downtown from the suburbs."

The St. Louis suburban office market is as good as it has been in 10 years, according to Don Land, executive vice president of Baur Properties which is in the process of releasing two blocks of space amounting to about 120,000 sq. ft that will come on the market in the fourth quarter of this year in Baur's Maryville Centre office park.

Sachs Properties reports 92% occupancy for its 18 office buildings in the company's mixed-use 1,500-acre Chesterfield Village project in west St. Louis County. Lease rates vary from $16.50 per sq. ft. for Class-B offices to $22.50 per sq. ft. for Class-A. These average 5% higher than rents of a year earlier.

Kathy Higgins, president of Sachs Properties, says "Concessions and incentives are not a topic of conversation." Higgins says that until a AAA-tenant is willing to sign a 15-year lease at a mid-$20s rate, a new office project will not happen.

Industrial

Floyd Sweeney, chairman and CEO of Sweeney-Finn Inc., says the shortage of industrial space is "pretty much through the spectrum. There are a few buildings for sale and a few properties for lease but not a big selection. The days of concessions are long since past with prices firm."

The new St. Louis Rams professional football team made one of the major industrial purchases last summer when the team bought a 20-acre site in Earth City from Ford Motor Credit Corp. for a practice facility and office complex.

The industrial market is tight in St. Louis County with occupancy at 97% or higher across the board, says Allen P. Klippel Jr., vice president of Nooney Krombach. "During 1995, we have seen the market change from a buyer's market to a landlord or seller's market. As a result of high occupancies, rental rates are on an upward trend."

According to Klippel there hasn't been any speculative industrial construction in St. Louis for almost seven years. But now speculative buildings are not only appearing on the market, they also are being leased upon completion. Klippel cites Nooney Krombach's leasing of about half of a 235,000 sq. ft. speculative distribution center being developed by Perkinson Realty. Perkinson plans another 235,000 sq. ft. spec distribution center as well.

One of the real success stories in the industrial sector is the resurgence of Chesterfield Valley since the flood of 1993. With an occupancy of more than 93% by mid-year that market is well on its way to full recovery, according to Lenore Herriges Burckel, Turley Martin vice president, research. For the 91 buildings affected by the flood, the rate is 91.2% while two years ago those structures had 1.9 million sq. ft. unoccupied.

For St. Louis County, industrial occupancy exceeds 96% in all but three submarkets, with only 2.9% office/warehouse vacancy and 4% for bulk space, Burckel reports.

Build to suit remains the most active segment of the industrial market. Paric Corp. has three such projects underway: a 41,000 sq. ft. office/warehouse, a 15,000 sq. ft. manufacturing facility and a 28,000 sq. ft. light assembly plant.

Clark of Clayco Construction forecasts that demand for new industrial/distribution space will remain strong this year and in 1996. "We are proposing to build more industrial/distribution space locally than we've ever built here in any previous year."

Retail

Rob Sherwood, managing director at Pace Properties, says several retailers new to the St. Louis market have either opened here or plan to do so in the near future. These include the Old Navy Store, Kohl's Department Store, Home Depot and 1/2 Price discount junior department store.

A vacancy rate of 8.1% for the metro area is reported by Tim Sansone, director of properties at The Sansone Group Inc. That equates to 5.8% for neighborhood centers, 6.2% for community centers and 10.8% for regional malls. "A number of sub-markets, including west St. Louis County, Central County, South County and St. Louis city, have vacancy rates well below 5%."

Sansone says the pace of new construction is moderating with about 1.2 million sq. ft. due to be completed this year. Announced projects totalling 425,000 sq. ft. are expected to be completed in 1996, he notes.

Sansone has two centers underway - The Plaza at Sunset Hills, a 400,000 sq. ft. power center with only 25,000 sq. ft. remaining available, and The Sho es at Sunset Plaza, 100,000 sq. ft. which is planned for a fall 1996 completion.

Other retail developments include expansion of Chesterfield Plaza regional mall to include a new 240,000 sq. ft. Famous-Barr department store, a 57,000 sq. ft. expansion to Dillard's department store, 83,000 sq. ft. of additional space for specialty stores and a new food court. A $750,000 renovation program at Northwest Plaza will include updating of common all areas.

Desco Group plans a 62,000 sq. ft. Schnuck market and 20,000 sq. ft. of retail in north St. Louis city. In late '95 or early '96 the company will start 31,000 sq. ft. of retail at Richmond Center in Richmond Heights where a Schnuck market was opened recently. A 110,000 sq. ft. center will be started by Desco this fall in the new community of Wildwood in west St. Louis County. Also this fall in St. Charles County, Desco will begin construction of an 87,000 sq. ft. center with two out-lots.

Joe Ciapciak, director of leasing at Pace Properties, says most new development is of the big box variety with consolidations continuing to be an important factor. Retail rentals have leveled off with only modest increases expected in the future. "Increases won't be nearly as large as they were in the last year or so."

According to the Midland Group's shopping center report, St. Louis County rentals are $11.70 per sq. ft. in south County, $11.50 per sq. ft. in west County, $9.31 per sq. ft. in north County and $9.75 per sq. ft. in the city of St. Louis. Midland has proposed a 14-acre center on Manchester Road in West County that would include a 7,500 sq. ft. building, a 24,600 sq. ft. strip center and a 52,425 sq. ft. building.

"Ground prices in St. Louis have increased dramatically in the last 18 months," says Sherwood. "They have really soared." High demand put more pressure on the market once the recession was over. "Before last summer there was very little land business, but since then, it has picked up tremendously."

Apartments

John Hoenig, CB Commercial apartment specialist, says the rental market continues to be strong with occupancies of over 95% in just about all well-managed, quality properties. As expected, rentals are on the upswing as well, Hoenig says. In west St. Louis County, generally acknowledged as the best multifamily market in the area, landlords are getting 5% increases per year, with St. Charles at nearly that figure. North and South county markets are rising 3% annually.

Patricia B. Borg, director of residential properties at Nooney Krombach, says occupancies at multifamily properties Nooney manages are running between 96% and 97%. "Because of the high occupancy we've been able to attain rental increases averaging about 4% to 5% this summer.

Hoenig says despite talk about new multifamily complexes, he believes that significant new apartment construction is at least a couple of years away except for low or moderate-income projects.

While apartments remain the preferred property for investment, the current lack of product for sale is causing the bloom to fade as some investors shift focus to offices which are more readily available and perceived to offer more on the upside, Hoenig says.

Hoenig reports that capitalization rates on St. Louis apartment sales range from 9% to 11%. "Cap rates near 9% were reserved for the highest quality, well located, newest properties. On the whole cap rates remained in the 10% to 11% range with investors being more selective and showing more concern for the quality of the product."

Ed Wilmore is a freelance writer based in St. Louis.