Like most big cities across the Midwest, St. Louis enjoys a thriving industrial market. But two industrial professionals working in this city agreed that this sector, while still strong, is in a bit of a slowdown today.
Jon Hinds, first vice president with CBRE, and Geoffrey Orf, senior vice president with Colliers International, are both speaking at the first annual St. Louis Commercial Real Estate Summit held by Midwest Real Estate News and REjournals.com. This event, to be held Oct. 19 at the Hilton St. Louis Frontenac in Frontenac, Missouri, will feature commercial real estate pros throughout the St. Louis area. These industry veterans will talk about everything from the strength of the apartment market here to the changes that the office and retail sectors are experiencing.
There will be plenty of industrial talk, too. And some of it might focus on whether the high amount of spec industrial construction in the region might finally have caught up with the St. Louis market.
What does this mean? Even though the industrial vacancy rate remains at an historic low here, the demand for industrial space has slowed. It might take longer now for developers to fill those big industrial spaces they are building.
“There is still a lot of construction going on in the industrial market,” Orf said. “At this point, the developers might be somewhat overshooting the demand. The demand is tempering a bit.”
Is this the sign of a market in decline? Probably not, as both Hinds and Orf said that the slight slowdown – emphasis on the word “slight” – was inevitable. It would have been impossible for demand to remain at the elevated levels that the St. Louis industrial market had seen since 2014.
“The slowdown we are seeing now is just part of the market cycle,” Orf said. “We’ve had almost five years of really strong activity. We are not going to have those kinds of years for 20 years. It’s cyclical.”
Hinds said that the St. Louis industrial market today enjoys a vacancy rate near 3.8 percent, historically low. But he sees signs that the demand for industrial space in the St. Louis market is starting to slow.
“There seems to be a little lull in activity for larger users,” Hinds said. “The concern I have is that we have quite a bit of spec construction right now. The demand for larger spaces, for whatever reason, has slowed down the last couple of months. The next few months will be a critical time for our market. It will be interesting to see how it responds. Will demand pick up?”
Just because there’s a slowdown now, doesn’t mean that the industrial market is heading for a prolonged cooling-off period, Hinds said. The St. Louis industrial market isn’t an overly large one. Because of this, it can change quickly, Hinds said.
“St. Louis can turn around on a dime,” Hinds said. “You get two or three significant deals and the market tightens up fast.”
Even with recent slowdown, the St. Louis industrial market has had an incredible run of activity. The low vacancy rate and soaring amounts of spec construction are evidence of that.
This begs the question: Why has the St. Louis industrial market been so strong for so long?
Hinds has no problem answering this question.
“Our location is a strong asset,” he said. “Where St. Louis sits geographically in the United States is a definite positive. We are right in the center of the country. We also have great highway access. We are an affordable market for industrial users.”
At the same time, the St. Louis industrial market is blessed with solid product. Hinds said most of the newer spec buildings in the market have valuable incentives attached to them, mostly in the form of tax abatement. This makes leasing industrial space in St. Louis more affordable versus markets that don’t have those same financial incentives.
There are challenges, though. It can be tough for companies to find the labor they need for their warehouses and distribution centers.
“It’s not necessarily the cost of labor that is the big challenge today. It’s the supply,” Hinds said. “It can be tough to find enough good workers. Every building you drive by has ‘Help Wanted’ signs in front. That is a concern and is certainly a challenge for companies.”
An evolving industrial market
Orf with Colliers said that almost any statistic you look at today shows that the St. Louis industrial market is in the middle of a boom period.
That doesn’t mean, though, that the red-hot days of this market aren’t cooling off a bit.
“On paper, it shows that we have had a tremendous amount of activity here in terms of square footage. But when I look at the market, in real time, it seems that activity is slowing somewhat this year,” Orf said. “This has been especially true since the second quarter of the year.”
Orf said that the industrial market here might have been boosted by several large deals, transactions that boosted activity a bit unnaturally.
Orf pointed to the pent-up demand that hit the St. Louis industrial market in 2014. This surge in demand absorbed almost all the large industrial space that was available in the market that year. This kicked off a surge in industrial construction that lasted through 2015, 2016 and 2017.
Much of this new construction was filled thanks to uncommonly large deals, Orf said. These big deals, though, aren’t ones that are common to the St. Louis market.
“We never had that many 500,000-square-foot to 1-million-square-foot deals happening at one time,” Orf said. “In 2017, we had a gigantic amount of new construction and absorption that happened. But a lot of that absorption was accounted for by a handful of transactions.”
Those big deals might not be as common in the future, Orf said. That could slow activity levels in the market here.
Another trend that is impacting the St. Louis industrial market? Orf pointed to the relatively recent practice of developers providing lucrative tax abatements for industrial tenants. These abatements make leasing space far more affordable. Those developers who offer abatements, then, will see more demand for their industrial space.
This could also result in larger swaths of empty space at industrial parks that aren’t offering abatements, Orf said.
“There will be space vacated by tenants who move to tax-abated space,” Orf said. “Rents are going to have to go down in those spaces or they will experience more downtime when trying to fill their vacancies. If you’re a tenant and you can move to a space where, because of abatements, you can pay less? You will make that move.”
Want to learn more about all the commercial sectors in St. Louis? Be sure to register for the St. Louis Commercial Real Estate Summit today.