By Jared Stinehagen, Sara Investment
St. Louis has long served as a crossroads for American industry with traditional manufacturing driving its economy through many periods of growth.
Now in the digital age this metropolitan region in the center of the nation’s heartland finds itself at its own crossroads: embracing a future powered by new tech‐focused industries while shedding some of its traditional – but waning – economic drivers.
A microcosm of major economic trends throughout the United States, the St. Louis market presents many opportunities for successful real estate development within key submarkets. The metropolitan area’s population has held steady, with slight growth from 2010 to 2014, and shows signs of picking up speed as young singles and empty nesters move back to urban areas.
Economic drivers support strong investment market
St. Louis benefits from the presence of several Fortune 500 companies in high‐growth industries, including the healthcare and insurance fields, that are committed to investing in the local economy. The region still boasts a strong manufacturing segment, albeit smaller than during the heyday of American manufacturing. Fast‐growing healthcare firms such as managed care company Centene, which has proposed a $772 million campus expansion in Clayton; Pfizer Inc.; and Express Scripts are driving demand for office space to fill their own needs and in turn are supporting growth in the service industries they rely on.
The manufacturing sector has retained major employment drivers, including Anheuser‐Busch and GM’s Wentzville van and truck assembly plant. GM also has a 1.1 million‐square‐foot sub‐assembly plant under construction in Wentzville, just one component of a record level of industrial real estate under development – nearly 7 million square feet – in the St. Louis region in 2016. That’s a pickup after a seven‐year lull as developers focused on filling demand for Class-A office space. St. Louis’ central U.S. location and high-quality labor pool are also attracting a new wave of distribution centers for ecommerce firms, including Amazon, which will open 1.5 million square feet of distribution space in the fall.
An apartment boom across the region – about 500 units currently under development in Clayton alone – indicates a healthy market with a growing population, and provides amenities to attract a young, highly‐educated workforce; a crucial factor in the long‐term retention of major employment drivers.
Regional risks tarnish some submarkets
As with the broader U.S. economy, St. Louis is not immune to risks associated with instability in the international oil and gas markets. St. Louis’ historic dominance in the energy market is waning, with Peabody Energy’s April bankruptcy filing providing a prime example. That company’s future presents risk for potential investors in downtown St. Louis, where Peabody is located, both from losing Peabody and losing the business it provides to the entire professional services sector.
Downtown St. Louis – while still a major driver of tourism and local culture – struggles with safety concerns that make some businesses wary of moving their offices into urban high-rise buildings. Discrepancies between the tax policies of the city of St. Louis and St. Louis County also create an incentive for companies to locate in the suburbs, further weakening the downtown market.
The market for retail real estate across the St. Louis region shows signs of plateauing, with the compression of capitalization rates making smart investment options harder to come by. But within two or three years, capitalization rates likely will cycle up again, creating opportunities as the apartment boom fuels new pockets of demand for service, retail and restaurants.
Submarkets within region promise opportunity
Depending on the niche an investor or developer is interested in, different submarkets within the St. Louis region offer great opportunities. For the long‐term investor looking to own high‐quality office real estate in areas with strong and steady demand, two markets stand out: Clayton and West County.
With vacancy rates between 7 percent and 8 percent, and projects such as Centene’s expansion poised to add more Class-A product, Clayton’s office market is booming. In the past decade Clayton – the seat of St. Louis County, located just eight miles west of the heart of downtown – has grown into the de facto central business district of the St. Louis region, as political issues and safety concerns have heightened in the city’s downtown.
The West County submarket, another 10 miles west, mimics the Clayton market with low vacancy rates, rising rents and affordable sale prices that make capitalization rates attractive. West County also offers favorable demographics: a high concentration of above‐average incomes, above-average home values and highly‐educated residents, all located along the central corridor of the region. In both markets, the positive trend in demand for high‐quality office space could bring opportunities in the next few years to buy existing office buildings, invest capital in improvements and reintroduce them as Class-A spaces with higher rents and more amenities.
Likewise, the industrial resurgence in St. Louis offers opportunities for investors looking for stable projects with good returns, whether by redeveloping functionally‐obsolete industrial inventory or investing in the 7 million square feet of new build‐to‐suit projects when the properties are up for sale. Absorption rates have held steady, even with new development, especially in the Earth City, Fenton and North County submarkets.
Jared Stinehagen is vice president of operations for the southern region for Sara Investments.