Heavy absorption and leasing activity are stimulating a continued construction boom in St. Louis, bringing even more new spec construction onto the market. Yearly absorption numbers have been positive since 2010 and the third quarter ended with historically low vacancy rates. Direct asking rental rates are approaching pre-recession levels, trending upward due to heavy absorption and leasing activity. There are reasons for caution, however, as pipeline activity appears to be slowing and average asking rental rates have decreased over the first three quarters of 2019.
Heavy industrial absorption continues with year-to-date overall absorption at nearly 3 million square feet (MSF) for the entire market. Much of this absorption can be linked to new construction projects that have been delivered fully or partially leased. This activity pushed overall vacancy to 6.04%, the lowest recorded vacancy rate since 2006. Performance varied between submarkets with some smaller submarkets reaching vacancy rates close to one percent. The Hanley/Brentwood submarket dropped to 0.98% while Jefferson County held steady at 1.16%. North County has the highest vacancy rate of any St. Louis submarket at 11.90%. This high rate is attributed to several large available spaces including 269,000 SF at NorthPark DC 1, 234,000 SF at Hazelwood TradePort III and 241,000 SF still available in 1609 Park 370 Place.
St. Charles County has seen many significant new construction deliveries thus far in 2019 totaling 1.85 MSF. A number of these new deliveries have been in or near Premier 370 Business Park including the 855,080-SF Amazon fulfillment center, Duke Realty’s 375,000-SF Premier 1001 spec building and FedEx’s 490,000-SF distribution facility. The largest delivery in the entire St. Louis industrial market was TriStar’s delivery of the first 1-MSF distribution facility of World Wide Technology’s 2-MSF campus in Gateway Commerce Center East.
As more speculative construction is delivered through the end of 2019 and into 2020, vacancy rates are expected to increase. Spec buildings make up 61% of current construction activity. Of this space, 89% is still available for lease. Absorption is expected to remain positive for the foreseeable future but at potentially slower rates. The St. Louis market has seen positive absorption every year since 2012 with some recent years over 4 MSF. The average asking rental rate is currently $4.29 per square foot (PSF) which, although higher than the five-year average of $4.19 PSF, is down from $4.86 in Q1 of this year. This could be due to the rate reductions by landlords competing with tax abatement and the introduction of several new 500,000 SF to 770,000 SF spec warehouses of in the Metro East with asking rates below $4.00 PSF. Although the market generally appears to be slowing, third quarter saw notable new deal activity in the 300,000-SF to 400,000-SF range.
The economy still appears strong as we approach the end of 2019 but with some caution related to tariffs and a potential trade deal with China. According to the Federal Reserve, the St. Louis unemployment rate dropped to 3.3% in August from 3.6% earlier this year. The local rate is below the national unemployment rate of 3.7%. The U.S. Bureau of Labor Statistics reported that nonfarm employment grew 1.9% for the St. Louis region from August 2018 to August 2019. This growth rate is tied with Nashville and higher than Kansas City (1.8%), Chicago (1.0%), and the nation as a whole (1.4%). However, a slowdown in U.S. Gross Domestic Product (GDP) growth is expected per the monthly national economic forecast conducted by The Wall Street Journal. The forecasted rate for 2019 is 2.2% with economists predicting 1.7% growth for 2020 and 1.9% in 2021. The Federal Reserve Bank cut interest rates in both July and September of this year as a preemptive move to hold off a potential market downturn. An additional cut may be imminent. The Commerce Department reported that durable goods orders dropped by 1.1% in September after another large drop of 2.3% occurred in May. Market experts are cautious about the national economy in 2020, but continuing eCommerce and 3PL leasing activity across the U.S. will help buoy the St. Louis market into the coming new year.