St. Louis Retail: Leasing, Development Activity Heats Up

Consumers are loosening their wallets in St. Louis, and the thaw in spending has given the local retail market a much-needed shot of adrenaline. The discount retailer is still king, but new concepts and developments are gaining ground. With positive absorption of space on the rise, investment sales are increasing.

St. Louis is poised to see a major development in the central trade area at the former Hadley Township site. After several failed attempts at development in the past 10 years, Hadley seems destined for redevelopment at last. The 40-acre site is located on I-64 in the central suburb of Richmond Heights and will consist of an assemblage of 150-plus commercial and residential parcels.

In the southern half of the development, Menards was selected by the city over Costco and will open one of its first St. Louis locations in early 2014. The site plan includes a 240,000-square-foot store with additional out parcels for retail and restaurant users.

In the northern half, Pace Properties has received approval to develop a two-story, 400,000-square-foot, big-box store for an as yet unnamed retailer. This development will further enhance the desirability of the Richmond Heights/Brentwood area as a retail destination and will boost asking rents in the vicinity.

In Chesterfield Valley, located in the west trade area, competition is brewing between two outlet mall developers. T-O Ventures LLC and Simon Properties Group/Woodmont Outlets are vying to build competing 400,000-square-foot outlet centers.

The centers would be approximately 3.5 miles apart. Simon Properties has already announced the signing of its anchor tenant, Saks Fifth Avenue’s OFF Fifth, which would be the first Missouri location for the retailer. T-O Ventures has declined to name tenants, but has moved forward with the groundbreaking. While both sides concede that only one center will be built, neither side is backing down.

Other developments in the planning stage include proposed Walmart stores in Ellisville, Shrewsbury and Florissant; a Sam’s Club in Glen Carbon; the Lindenwood Town Center in St. Charles anchored by a Schnucks supermarket; and a mixed-use redevelopment of the 122-acre Northwest Plaza site in St. Ann.

National Retailers Expand, Investments Take Off

The St. Louis market suffered through high vacancies and lower rents during the recession years of 2008-2010, a time when many retailers such as Ultimate Electronics, Borders and Linens ‘N Things vacated mid-box spaces.

However, we are starting to see a light at the end of the tunnel. In a promising indicator of recovery, several national retailers are entering the market including hhgregg, Nordstrom Rack, Ross Dress for Less, Five Below, buybuyBABY, Savers and Menards.

Read more at www.heartlandredbusiness.com

This week’s disappointing job growth numbers make it abundantly clear that it’s still a tenants’ market out there and no amount of aspiring to the contrary will make it easier for landlords fighting to attract and retain them.

The job news “is an obstacle and a cautionary line creating uncertainty in the short-term outlook,” said Carl Conceller, principal of NAI Desco in St. Louis, MO. “Landlords are keenly aware of the limited tenants in the market place and the need to maintain occupancy in a highly competitive market. Landlords will continue to be aggressive in structuring leases to capture tenants as early as possible, while blocking them from the competition.”

For the record, here’s a summary of monthly jobs number released this past week by the U.S. Department of Labor: Total nonfarm payroll employment grew by just 69,000 jobs; following 77,000 new jobs in April. By comparison, the average monthly employment gain in the first quarter of the year was 226,000.

In May, employment rose in health care, transportation and warehousing, and wholesale trade -basically the industrial sector. While construction, accounting and bookkeeping services, in services to buildings and dwellings and professional and business services lost jobs – basically the office sector.

“The report was disappointing, but not unexpected considering the negative economic news of late regarding the European debt and its potential impact on the U.S. economy,” Conceller said. “The report, in conjunction with the European debt crisis, has obviously disrupted markets and caused uncertainty among U.S. businesses.”

Larry Hausman, senior associate of Marcus & Millichap in Louisville, KY, said that if landlords were smart they would make whatever deals they can get done and still make a profit.

The job numbers don’t make prospects for the investment market very attractive either, Hausman said.

“Investors are going to shove their hands even deeper into their pockets, choosing to take their licks against inflation while staying in cash a while longer,” he said. “There will be fewer buyers until Europe stabilizes and more than 125,000 new jobs are created each month (what is needed to break even after population growth).”

NAI Desco’s Conceller had a different take on impact of the disappointing job numbers on investing.

“Investors recognize that the markets are at historic lows. The current environment provides unique opportunities to acquire investment properties well below replacement value with significant upside growth and returns far greater than can be achieved in alternate investments,” Conceller said.

“A major contributing factor to the investment market is the unusually low interest rates available to qualified investors,” he added. “Additionally, foreign investors are reallocating capital into the US real estate market because of the relative stability of the U.S. economy when compared to many foreign markets, the aforementioned report notwithstanding.”

Still, the latest job growth numbers proved to be a double whammy with little new hiring and more announced reductions. In May, the nation’s employers announced plans to cut 61,887 workers from their payrolls, the most since last September 2011, according to the latest job-cut report also released this past week by global outplacement firm Challenger, Gray & Christmas Inc. The May job-cut total was up 53% from April and 67% over May a year ago.

May job cuts were dominated by the computer industry, propelled by Hewlett-Packards announced layoffs of 27,000 workers.

“We may see more job cuts from the computer sector in the months ahead. While consumers and businesses are spending more on technology, the spending appears to favor a handful of companies. Those that are struggling to keep up with the rapidly changing trends and consumer tastes are shuffling workers to new projects or laying them off altogether,” said John A. Challenger, CEO of Challenger, Gray & Christmas.

Mark H. Fowler, senior vice president of Weichert Commercial Brokerage Inc. in Edison, NJ, said: “The market has definitely slowed down again. Smaller tenants were showing signs of entering the market, which we had not seen for a long time. However, that began to dry up well before last Friday’s numbers.”

“We are still seeing activity from medium to large tenant requirements but the bread-and-butter transactions are lacking,” Fowler said. “I am not sure that demand will worsen as a result of the numbers but we probably face a long, slow summer.”

“As for landlords, they have been itching to raise rents but this will only delay that process a while longer, as the advantage remains in the tenant’s hands,” Fowler said.

McDonald comes to NAI DESCO with extensive commercial real estate experience. A St. Louis native, McDonald started his real estate career at Gundaker Commercial completing deals in many facets of real estate including office, industrial, retail, land, medical and investments. Throughout his career, McDonald has been involved in hundreds of transactions representing local and national landlords, buyers and tenants.

“We are pleased to welcome a broker of John’s caliber to our Retail Services Group,” said Peter Sheahan, principal and head of the Retail Services Group. “His depth of experience and expertise make John a good fit for the company.”

Some of McDonald’s past and present clients include Ameren UE, Denny’s, Fabick, Midwest Bank Centre, Medicine Shoppe, Michael Del Pietro Restaurant Group, PNC Bank, Sylvan Learning Centers, True Value, Wells Fargo, Wendy’s & many more.

McDonald graduated from the University of Dayton with a Bachelor of Science degree in Political Science. He is an active member of the International Council of Shopping Centers (ICSC), the Urban Land Institute (ULI), the National Association of Realtors and the St. Louis Association of Realtors – Commercial Division. He is also pursuing the Certified Commercial Investment Member (CCIM) designation.

Lack of credit, anemic job growth and a high level of uncertainty have lead to choppy markets in 2010. Values rallied early in the year only to pull back by mid-year as the anticipated economic recovery failed to materialize. In the first quarter investors expected the recovering economy would begin to improve fundamentals in the second half. But as economic growth slowed to a crawl, commercial real estate values have pulled back as of mid year. According to Moodys/REAL Commercial Property Price Index, pricing had improved nationwide by 8.6 % from their October 2009 lows, but by mid year had pulled back to a modest 4.2% improvement. The index reported that even after rallying in the first quarter pricing was off .9% for the first half  leaving the market 41.4% below the peak level realized in October 2007.

Nonetheless market activity is up markedly. According to Real Capital Analytics July volume was more than double the prior year level. However the bulk of the activity has been in core assets in primary and major markets. Value added investments particularly in secondary markets still struggle to find a market.

While strong investor demand for the best assets has begun to create greater transparency and pricing clarity, the overhang of distressed property is keeping a lid on prices and putting downward pressure on values. This will likely play out over the coming months if not years. As markets and values improve, banks which have been reluctant and patient sellers will begin to unload or otherwise force the sale of REO or underwater property. It doesn’t appear that the wave of distressed property sales will push the market below the prior lows, but rather the assets will be sold into any meaningful uptick. This unwinding process will create opportunities for investors to buy on the dips as the market takes a crooked stair step to recovery.

Our view is that, while choppy, the commercial real estate market is on a positive mid-term ascent. After the November elections as economic policy clarity improves, new confidence will return and job growth will follow. We would expect to see strengthening tenant demand by year-end and through 2011-2013.  In this early and still uncertain stage of the recovery it remains an opportune time for both tenants and investors to lock in long-term values.

-Jeffrey Finn

Jeffrey M. Finn is the President and CEO of NAI Global, the premier managed network of commercial real estate firms and one of the largest real estate services providers worldwide.