Recent years have seen industrial commercial real estate as a “dynamic” sector that has seen “dramatic growth,” according to MetroWire Media’s 2023 St. Louis Industrial Summit, hosted at the Watson Road location of Woodard Cleaning & Restoration.
The key to continuing that trend is to look for smaller properties and projects, speakers agreed, with environmental regulation a major area to keep in mind. Moderator Amanda Bradham-Little, marketing director at Pace Properties and Avison Young, opened the conversation by asking speakers for an overview of the industrial market.
“Industrial has been the backbone of commercial real estate, but often second to office,” said Drew Clary, principal at Intelica, of his perspective from 10 years in the profession. The good news is that “leasing rates are going up, although interest rates are having an impact and sale transactions are down. We’re seeing sales volume drop, but owners/users still need space. It’s been a weird market, but I think industrial is more well-insulated — people are holding onto buildings.” Clary noted that “some buildings that were at a 6 cap a year ago are now at 7 cap, which eats up the entire “profit” of a project.
For Nick Cook, development manager at the Pannatoni Development Company, “Financial challenges are what we’re thinking about every day. In the last three years, nothing made sense. Today, what we’re seeing is what’s expected: a period of market adjustment that applies to developers. We’re trying to move things along as quickly as possible, but it won’t stay this way forever.”
Ben Cahill, senior vice president of brokerage at Avison Young, compared the current landscape to being “a little like ‘The Tale of Two Cities.’ Big bulk (properties) are very slow; smaller properties are very robust. Where we expected one or two tenants for a building, we’re going to see three or four tenants.”
Matthew Stack, president-St. Louis at Russell Co. agreed. “Even the definition of what is bulk has gone down — smaller spaces are more stable. We’re not having an accelerated pace of volatility. Defining future value is the current focus. Industrial is still fundamentally strong for smaller projects.”
While the industrial sector is strong, the environmental aspect is crucial and will be changing in the near future, according to Rachel McShane, project director at SCS Engineers.
“The Environmental Protection Agency (EPA) is working tracking pollutants in the air,” McShane said. “To identify concerns, they have started holding community meetings. There is a lot more scrutiny, even if a project is permitted. When you’re expanding [an existing building] or building a new property, there is a lot more focus (on environmental aspects).”
The EPA doesn’t want to be seen as anti-building, but does have to deal with that perception, she noted. The key to handling EPA and related — local, regional, etc. — aspects of industrial projects is to “find a partner that is knowledgeable and can facilitate getting permits,” McShane advised. “You have to pay attention (to current and upcoming regulations and limits) and do all that is called for.”
Environmental regulations are “always under review” and both the public and the regulatory agencies are paying more attention to environmental justice. Developers should expect action on ozone-only pollutants and particulate matter limits to become tighter, which McShane said “will have a huge impact on air permits. The industrial sector “serves an important role in communities, but you have to be proactive.” McShane warned that “the Missouri Department of Natural Resources is starting to come down hard on stormwater permitting.”
She highly recommended performing compliance audits on current or planned projects now to head off major issues farther down the line, when changes become far more expensive and time-consuming. “Regulations are likely to become more stringent and you can no longer write of PFOS as de minimis,” she said. “It’s important to be proactive in your due diligence.”
In thanking McShane for her input, Cook said “From a developer’s perspective, we have to stay on top of due diligence. That phase is all about risk and we need all shareholders to be on the same page.”
Stack noted that “industrial relies heavily on infrastructure” and mentioned Maryland Heights as a corridor for growth because such due diligence has been done.
Asked about the impact of artificial intelligence (AI) on the industrial sector, panelists agreed that this technology can help increase efficiency, but shouldn’t be relied on too heavily. Cahill and Cook have used AI to draft letter and Excel formulas; Cook has used it to connect macros and noted that Amazon is using it in buildings and documentation.
“We are looking at AI for health and safety plans, responses to RFPs and Requests for Qualifications,” said McShane. “It can create huge savings in staffing and time, but I caution you to be careful about nuance. Don’t discount the human brain and outsource too much to AI.”
Stack warned that AI can mean that “you lose any proprietary control over whatever you use it with.” One use could be for entering parameters in searching for properties to purchase, develop or upgrade, he said. “Use it as a tool, but don’t use it for everything,” Clary suggested. “It’s fascinating, but use caution.”
In looking at the future of St. Louis industrial real estate, panelists agreed that smaller will be better and environmental matters will play a large role.
“Electric vehicles, carbon footprints and various environmental matters will be important,” said Stack. “Also, how does the industry relate to unused space, functionally obsolete buildings and in-fill projects?”
McShane predicted that “the biggest thing you’ll have to cope with will be increasing emphasis on environmental justice. It will behoove you to do a lot of public relations work and community outreach even if you get permits.”
Cook said that “Metro East has typically been the focus of St. Louis submarkets, and bulk efforts probably will stable, but the market for bulk tenants will slow down. The trend for small to mid-size will continue to be the sweet spot for St. Louis, along with our proximity to supply and demand. St. Louis is not overbuilt — we aren’t staring at a giant wave of development, which is very reassuring.”
He suggested marketing projects sooner than in the past and lining up partners a little earlier as well, and agreed that Maryland Heights will be the new focus for the sector.
Overall, “St. Louis is really well-situated” for industrial projects, Cook concluded. While Cahill expressed “a little concern about small-business bankruptcies” in the future, Clary noted that there are about 3.7 million SF of industrial space currently under construction, making the St. Louis area well-insulated.
“We’ve delivered less new product and get a rap as not super-active, but stable,” he said — and that isn’t a bad thing at all.
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FEATURE PHOTO: Panelists at MWM’s 2023 STL Industrial Summit. Photo credit: MWM STL