table of experts commercial real estate · in addition, donovan has a long history of executing on...

TABLE OF EXPERTS

COMMERCIAL REAL ESTATE

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Mike Donovan brings 30 years of experience and a wide range of real estate deal making skills to the Balke Brown Transwestern team. Donovan has an extraordinary ability to manage all the functions necessary to acquire and operate institutional quality commercial real estate. Those functions include the identification of a desirable asset, formalizing realistic income and expense projections, managing the due diligence process, creation of an asset management plan and successful leasing of the property. In addition, Donovan has a long history of executing on the ultimate sale of the asset. Donovan manages an 11-person brokerage staff and co-manages a 20-person commercial property management staff. In 2017, Donovan executed the sale of six Institutional quality office buildings valued at more than $90 million.

Andrea Kendrick joined Berkadia as a director in 2009. Prior to Berkadia, Kendrick worked for Grubb & Ellis as an investment adviser and Boston Capital as a multifamily investment analyst in the low income housing tax credit division. Since then, she has closed on more than 20,000 units and $1 billion in sales volume. Kendrick has been featured as a St. Louis Business Journal 30 Under 30 honoree, Heavy Hitter for Largest Multifamily Investment Sale by SLAR, one of 25 national winners of Connect Commercial Real Estate’s 2017 Next Generation Award and is consistently ranked in the top five teams within Berkadia investment sales advisers. Kendrick received a B.A. from University of Missouri - Columbia.

Melissa Smith-Groff, named a national 2017 Women of Influence in commercial real estate, co-chairs Husch Blackwell’s corporate real estate group, serving clients with the acquisition, development, sale and leasing of commercial property. Smith-Groff recently guided a $100 billion company in the sale of one of its businesses for $6 billion, coordinating the global transfer of real estate in more than five countries. She serves as legal counsel to a Fortune 500 company with respect to its real estate portfolio, including the negotiation of their headquarters relocation from California to Texas. Additionally, Smith-Groff represented a medical device company with the acquisition and development of a new $100 million manufacturing facility, considered one of the most innovative facilities in the U.S., and is the lead relationship partner to a pharmaceutical company the firm has called a client for more than 40 years.

Bruce Holland serves as CEO at Holland Construction Services, which he founded in 1986. Under his leadership, Holland Construction Services has developed a strong company culture that balances personal family and business family, customer and employee satisfaction, and controlled growth that allows the company to maintain both its values and its close relationships with customers, while still providing the high-quality service, for which it’s known. Holland has personally assisted in the development of projects, including land assemblage and construction of buildings for clients, as well as for his own investment portfolio.

Matt Drinen is the director of tax credit services at CliftonLarsonAllen (CLA). Drinen leads CLA’s National New Markets Tax Credits practice. Additionally, Drinen assists CLA’s clients on matters related to historic tax credits, local incentives, site selection, among other services. Drinen has experience in structuring, underwriting, managing and compliance of NMTC/HTC Investments. Drinen also has experience in commercial real estate and business consulting with respect to valuations, structured finance, and mergers and acquisitions. Drinen holds bachelor degrees in finance and commercial real estate from the University of Missouri - Columbia and an MBA from the Olin Business School at Washington University.

Tom Bajardi is a commercial real estate broker with Sansone Group. During his 20-year career, he’s completed more than 1,000 transactions in 41 states, managing sales and leasing volume in excess of $1 billion. Bajardi specializes in tenant and landlord representation in the St. Louis office and medical markets. He is a member of Sansone’s Principal Circle and Executive Committee. He is a Certified Commercial Investment Member, has served as president of the St. Louis CCIM chapter, and received the CCIM of the Year award. Bajardi is also a member of the Society of Industrial and Office Realtors. He’s served on MGA Board of Directors, YMCA Board of Managers and Corporate Achiever for the MS Society.

MIKE DONOVAN

ANDREA KENDRICK

MELISSA SMITH-GROFF

BRUCE HOLLAND

MATT DRINEN

TOM BAJARDI

MEET THE EXPERTS

16 TABLE OF EXPERTS

What is the outlook for commercial development in the region in 2018?

Bruce Holland: On the construction side, we’re still very busy. We’re involved in quite a bit of multifamily housing. We were fortunate enough to start with Balke Brown on some projects on the Illinois side, and it expanded to the Missouri side. We’ve seen some changes. Two years ago, we saw a lot more people looking to do projects and a lot of those deals did not happen. Now we see the educated and the experienced developers doing the projects, and where it used to be projects with 250 to 300 units, we see more infill projects, with some as small as 50 to100 units. It’s really all about location. The urban infill locations are attractive to the millennials.

Do you anticipate an increase in business this year?

Bruce Holland: Based on our current backlog with mul-tifamily projects, we think that we’re going to be slightly up from where we were in 2017, in that particular market. Health care also has been big for us. We just completed two hospitals on the Illinois side, and now we’re seeing a lot of medical office building projects there.

Andrea Kendrick: Apartment demand is expected to remain steady in St. Louis, which is mostly driven by the millennial and senior demographic. It will be exciting to see the new projects delivered in 2018. Our new supply grew by about 38 percent last year with the delivery of 1,600 new units. We expect to have another 2,000 units delivered in 2018. Some people have said it seems like a lot; but I disagree. We have a total of almost 100,000

units in our market overall, and when you compare that to our neighbor, Kansas City, they have about a million less people than us, and roughly 60,000 more units in their market than we do already. Kansas City had about 4,000 new units delivered last year. So for St. Louis, 1,600 units last year and 2,000 units this year isn’t going to be an oversupply of product in St. Louis. Develop-ers in our market are smart and they typically don’t get ahead of demand. Overall, we currently have about 11,000 units in the St. Louis MSA, either in the planning, preconstruction, under construction, or leasing stage and roughly 5,000 of those are in the central corridor from downtown St. Louis to Chesterfield.

Tom Bajardi: In the office market, I think we’ll contin-ue to see user-driven construction projects for large office users, much like we saw with Rabo AgriFinance and Bunge, who needed large chunks of space that weren’t readily available in the existing inventory. Also, I don’t foresee any speculative office building devel-opment in our market in the near term. Most develop-ers and lenders will require a high percentage of those buildings to be pre-leased before they go vertical with the construction.

Matt Drinen: I’m pretty bullish on St. Louis for 2018, with the amount of redevelopment and new develop-ment. In 2017, there was 2.1 million square feet of office space under construction. That’s a massive amount of office space being built, and I believe approximately 86 percent of it is built to suit. So, that just gives me a lot of confidence for the future of St. Louis. And in talking to our clients and learning their future forecast for the next year to five years, it gives us a lot of confidence

that there’s going to be a lot of further activity in the near future.

Mike Donovan: You’ll see limited speculative office development. Rental rates have not increased as rapid-ly as construction costs . So, you’ll see limited or no spec development, but you may see some build-to-suits or sig-nificantly pre-leased developments. Specifically in the St. Louis office market, current market rents don’t allow for a lot of new construction from a spec basis. The build-to-suits are a little bit different. On the multifamily side, Bruce is building a multifamily project for us that we’re going to deliver next month called Encore, which is an urban infill in the Highlands, and that’s next to our most recent project, Cortona, which is about 98 percent leased. So we’re very optimistic about multifamily, especially in urban infill, niche locations. We’re not as optimistic on generic multifami-ly, garden-style apartments in the suburbs. We really like the infill or urban niche locations where there’s walkable amenities. The demand for walkable amenities has fueled significant development In Clayton, where it’s probably going to take the next 18 to 24 months to absorb some of the new construction.

Melissa Smith-Groff: I have a more nationwide practice, but in St. Louis right now we have several large deals per-colating. They are build-to-suits or they are being devel-oped for specific users. I am seeing more action in the industrial, office, multifamily — all of those — than I have seen in recent past years. A lot of the deals are currently in the planning stages. With respect to office space, users are attempting to reduce their square footage. Business-es are trying to co-locate their locations, cut the actual amount of leased space that is necessary and reduce their


Holland Construction Services • 618.277.8870 • hollandcs.comSenior Living Education

Recreation

Multi-Family

Healthcare

“”

Urban areas are popular given the demand for live-work-play lifestyles.

The millennials seem to be driving this more than

anything...BRUCE HOLLAND, Holland Construction Services

overhead real estate costs. Many businesses are attempt-ing to use shared-space arrangements, but there are sev-eral factors that contribute to whether or not that arrange-ment will be successful for a particular business, including the type of work that is being performed and what makes those employees more productive (concentrative versus collaborative activities). The No. 1 comment that I hear with respect to our real estate portfolio planning for clients is, how can we increase productivity but also cut our costs? The easiest answer to the cost-reduction goal is a decrease in square footage. Businesses are actively determining which employees need a desk five days a week and who

can share space or work remotely.

Tom Bajardi: In addition to sharing space, we’re seeing a lot of employers allowing their people to work remote-ly from home to cut down on square footage costs, and more employees coming into the office and just grabbing an open space with a laptop. So, employers are not reduc-ing head count, they’re just allowing their employees to be more flexible with their time, and how and where they’re working.

Mike Donovan: That being said, I think the most successful office projects are actually the office projects that are not

necessarily the cheapest ones, but the projects that are investing in new amenities. Employers have to attract top employees and top employees are drawn

to highly amenitized buildings. While employers are providing office space that is maybe getting small-

er, employees want cafes, restaurants, fitness cen-ters, conference rooms and walkable amenities. So,

the most successful projects have those amenities, and the landlords are achieving surprisingly high rents. As

It relates to efficiency, corporations are probably leas-ing less space, but maybe paying more per square foot.

Other trends?

Andrea Kendrick: In the multifamily Industry, developers are competing for renters from an amenity standpoint. Renters are seeking the live-work-play lifestyle and devel-opers are delivering for them. Many of the amenities are technology-driven and include package concierges, Wi-Fi in all common areas and controlled access video monitor-ing screens at the entrances. Other amenities also include state-of-the-art fitness centers, personal training, dog grooming stations and resort-style rooftop pools. It’s really driven by this demand for the live-work-play environment.

Matt Drinen: The hospitality industry downtown is seeing a significant uptick with convention business. And so now you’re seeing a lot of hotel development in downtown St. Louis, which is fantastic. We have the Jefferson Arms build-ing that’s going to be online in a couple of years, and then the Railway Exchange, which is still in predevelopment.

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18 ST. LOUIS BUSINESS JOURNAL

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”

The No. 1 thing I’m hearing when we’re doing portfolio planning for

clients, is how can we cut our costs? The answer:

square footage.MELISSA SMITH-GROFF, Husch Blackwell

”

The headquarters buildings that were new construction last year in West County and the Highway 40 corridor are also very, very popular based on proximity to the decision-makers’ homes, where drive times are a very important factor.

TOM BAJARDI, Sansone Group

“There’s a lot of room for growth in the Cortex area as well.

Bruce Holland: There’s a lot of redevelopment of buildings downtown and elsewhere in the city. The Chouteau Grove, the Armory and the Foundry are all really good projects that are going to help the downtown area. Urban areas are popular given the demand for live-work-play lifestyles. The millenni-als seem to be driving this more than anything, but surprisingly, just like the Cortona project, there’s some 60-year-olds living there because they like that lifestyle. Tom Bajardi: On the office side, the most active and sought-after submarket is Clayton. We are seeing approximately 5 percent vacancy for Class A there. So, from an office perspective, Clayton is still the most desirable submarket. Downtown, we know Ballpark Village Phase II is going vertical, and that will get a lot of atten-tion. But downtown office isn’t our most attractive submar-ket, which is typically the case in other major metros. The headquarters buildings that were new construction last year in West County and the Highway 40 corridor are also very, very popular based on proximity to the decision-mak-ers’ homes, where drive times are a very important factor. Currently, West County and Clayton seem to be where the most leasing velocity is for office users.

Mike Donovan: I would throw Creve Coeur in there, which is more in line with the live-work-play concept. Creve Coeur has hotels, restaurants, shops. There’s a lot of walk-ability in Creve Coeur.

Bruce Holland: Senior living has been a great market for us. In fact, next year it will probably be 30 to 40 percent of what we do. And it’s kind of a follow-up on the multi-family, it’s the same type of construction.

Any new amenities in that particular niche?

Bruce Holland: We’re seeing a lot of the assisted-living projects that we did in years past are now adding mem-ory care.

Matt Drinen: We’re seeing that as well on the New Mar-kets Tax Credits consulting side. A lot of those projects are adding those type of services.

Bruce Holland: Everything is a little more upgraded. A lot of it’s private pay, and there’s more people that can afford to do it. So, the facilities are getting nicer. Matt Drinen: We see a lot of the greenhouse models for senior living where it encompasses everything for those individuals. And it’s much nicer amenities.

What are the opportunities with new development versus existing?

Andrea Kendrick: With regards to multifamily, the oppor-tunity on existing product is value add. It has been the buzzword in the multifamily industry for the last couple of years, and it will continue to be in 2018 and 2019. I am sell-ing a 300-unit community that was built in 1979 in Ches-terfield, an affluent area of St. Louis County. The current owner began renovating units this past year. In the gar-den-style buildings, the owner added a washer/dryer in a hall closet but the unit still has original kitchens and baths, and they have achieved a $250 per month rent increase for the washer/dryer. In other units, they’ve added wood plank flooring, and have achieved a $100 per month rent increase. Overall, the rents are averaging around 85 cents per square foot, which is relatively low when compared to other properties in the submarket and that’s why this property is an excellent value add opportunity for a buy-er. In addition, the first apartment community in Chester-field in a little over 30 years is under construction. They are projecting rents to be around $2 per square foot. The new construction is great for the submarket and helps the

existing owners improve their properties for rent premiums as well.

Bruce Holland: Funding used to be an issue, but we find more people — the construction trades’ pension funds and others — interested in seeing projects happen. So, I see very few multifamily and senior living projects that don’t happen because of the funding, because they know that they’re not going to go dark. There’s always going to be a demand there.

Mike Donovan: The office market is similar to the resi-dential market. We were involved in a partnership that closed on a Creve Coeur office building, Westview Place, in December. We are planning to Invest about $2 million in it in year one to enhance the lobby, add amenities and enhance the experience for the tenants. We think there’s a much better opportunity in buying existing product and improving it as opposed to building a new office project, which is very expensive and requires very high rents to provide a reasonable return.

Tom Bajardi: Bruce mentioned it on the front end of the conversation about the growth he’s seeing in building medical facilities, and we are also seeing a lot of new construction come out of the ground from medical users, including health care systems, individual practice groups and outpatient centers as they try to get their footprints close to population centers and become more conve-niently located.

Matt Drinen: There’s a wealth of incentives and programs for developers, businesses and nonprofits. There’s feder-al, state and local, and they’re all dependent on where the

project is going to be located and what’s available in that municipality. But from a federal perspec-tive, I mostly deal with New Market’s Tax Cred-its and then a small portion of historic and low-in-come housing tax credits. Since joining CLA, I have learned not all developers and businesses are aware

of the New Markets program. Before CLA, I was on the investor side for these credits. And the thought was that the secret is out on the New Market’s Tax Credit program as we worked with a lot of seasoned developers. But as I’m finding out now at CLA, that’s not the case. So, my role in the past two years has been getting the word out to our clients as far as the

subsidy that they can acquire through this program. As far as tax reform, not a lot has changed to the programs themselves. There were minor changes on the historics, but nothing significant. It’s really just how the investor recognizes those credits on the timing perspective. But I would say, if there was any significant effects to those pro-grams, it’s going to be in pricing. Corporate tax rates have decreased to 21 percent. From what we’re hearing, the

R CONTINUED FROM PREVIOUS PAGE


investors appetite for those credits are diminishing a little bit. But it might allow new investors into the market. One interesting result out of tax reform that we’re aggressive-ly looking into right now is the Opportunity Zone program that was created out of the recent tax reform. It’s allowing investors to delay or reduce their capital gains on prior investments if they put those prior capital gains Into new investments located into what’s determined to be Oppor-tunity Zones, which are low-income census tracks. Inves-tors would also not be taxed on future capital gains In these opportunity zone funds. So, we’re seeing a huge opportu-nity for those investors and projects looking for funding.

What’s the state of the office investment market in St. Louis? Who’s investing, and is the current office market better for tenants or landlords?

Tom Bajardi: Many office investors in St. Louis recently have become more local players versus national. If you look at the roughly 17 transactions that traded last year, maybe 13 or 14 were local buyers and the remainder from out of town. So, we’re seeing a lot more local and regional investors in our office market. As to the second part of your question, I think that’s very submarket driven. In the Clay-ton, West County, Creve Coeur markets, it’s very heavily weighted toward the landlords based on the lack of avail-able space. We’ve seen rents tick up over the last 18, 24 months. So the tenants are getting less attractive deals. Incentives are coming off the table. It’s the opposite for the downtown market where the tenants still find themselves in a position of leverage with landlords. Incentives are still plentiful in the downtown office market.

Mike Donovan: I would concur with what Tom said. Many

of the buyers in the last two years have been local opera-tors that either have created funds, or have access to insti-tutional capital. There’s four or five firms that were very active in raising money and deploying it. You do have a handful of regional and national buyers, but for the most part, it’s St. Louis firms that have raised money that are the most active. Pricing is good. Most of the office build-ings that have been on the market in the last two to three years have sold. So, there’s very few office assets that have been on the market that haven’t sold. That indicates it’s a fair market from a buyer and seller standpoint. Tenant demand is active In most sub-markets. There’s probably two or three very strong landlord markets. Clayton, cer-tainly West County, Highway 40, maybe Creve Coeur that are strong and offer landlord’s some pricing power. The weakest submarket Is certainly downtown.

Businesses prefer to hold their real estate and lease arrangement. Why is it important to pay particular attention to lease documentation, and what are some important issues to consider?

Melissa Smith-Groff: Businesses tend to use lease arrange-ments because of the inherent flexibility. The importance of lease documentation, however, can be overlooked by businesses. A lease agreement is a living document that governs the landlord-tenant relationship for the entire lease term. When a company buys property, for example, they enter into a purchase-and-sale agreement; after the deal closes, that agreement, for the most part, goes away. With a lease, businesses also tend to think a short peri-od of time does not need as much attention. In my expe-rience, however, those short-term arrangements tend to get extended, and companies avoid relocating, as moving

costs are prohibitive. So, when the original lease is extend-ed, the business is stuck with certain agreements that become more important as the term grows longer — but are much more difficult to update during an extension peri-od. When negotiating a lease, the No. 1 consideration for clients is direct economic impact. If you negotiate a great deal at the letter-of-intent stage, then you need to make sure those terms are actually inserted into the lease doc-ument. Quite frankly, they’re not usually done correctly on the initial draft. There are also a lot of unintended impacts, some of which end up having an unintended economic impact. Operating expenses are an example — how those are calculated, whether it becomes a profit-sharing cen-ter for the landlord, versus the tenant who just wants legit-imate operating expenses passed through with respect to common areas. There are a few issues that I most fre-quently get calls about. First of all, operating expenses — should I actually be paying for this or not, or am I responsi-ble for this cost? Secondly, liability, indemnity and casualty obligations, all of which can be glossed over fairly quickly at the negotiation stage. Whenever I review those provi-sions in an older lease, I wish that the parties had done a better job of drafting them. And probably the third thing that I get a lot of calls about is the assignment and sublet-ting language, especially with the way the market fluctu-ates and businesses realign. Companies try to narrow their business focus, and in order to do so, they will move their properties to different entities to go with specific business-es. When they do that, you have to go through every lease document and determine, “Do I have the right to make this transfer or will I need to request consent from a third-par-


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ty landlord?” A need for the consent piece could delay or potentially skew the business deal. I had one deal where we needed a landlord’s consent to transfer a lease in order to close a business acquisition transaction. In that location, the market was tight, and the landlord didn’t even have to be reasonable in considering whether or not to grant its consent under the document. We ended up having to renegotiate a higher rent rate in order to obtain the nec-essary consent and close the overall business transaction. Given the market trends currently, I really recommend that clients obtain extension options. They were not a big deal for years, and companies didn’t necessarily care wheth-er or not they were included in the lease package. They

would just go back to a landlord and renew their lease. But having the right to unilaterally extend the term, and also being very clear about the future rent rate for the lease term extension, is becoming a much more important in St. Louis and also across the country. Some leases indicate that if an extension option is exercised, then “the parties will discuss and agree upon the future rent for the exten-sion term,” but that just isn’t good enough. In some juris-dictions, a court will not enforce that type of provision. It’s important to be clear on what extension rent rate will be paid or at least specify how that rate will be determined. Also, given the way the market keeps changing, my cli-ents want even more flexibility from their leases. Clients that are service providers use leases because their loca-tions track their client contracts. They will therefore need

to have contraction options or early termination rights tied to their work flow. So, we are back to where I started with the concept of flexibility — a business’ right to stay longer in space; a right to decrease space; a right to get out early if needed; a right to move their location to adjust to work.

What are the outside influences that are creating momentum in the apartment market?

Andrea Kendrick: Continued job growth is driving rental demand in the metro area. Three of the top five employers in St. Louis are in the health care industry, which has been historically stable for our city. We’re see-ing a lot of the new multifamily in the central corridor surround the new commercial development. For exam-


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ple, Clayton and the surrounding area will benefit from Centene’s $770 million campus expansion; the Midtown and Central West End new multifamily developments will benefit from BJC’s growth, the Metro East will ben-efit from the new St. Elizabeth’s Hospital. Job growth is really the driving factor.

Will there be enough growth in the region to sup-port that increase?

Andrea Kendrick: Well, historically St. Louis has been a stable market. We typically see 2.5 percent to 3.5 percent annual rent growth. REIS is projecting 4 percent this year, which may be a little ambitious, but investors are looking to buy in markets such as St. Louis where they can obtain

the stability to balance their portfolio. The cost of capital is the same for these investors whether they’re investing in St. Louis, Dallas, Atlanta or Phoenix, and St. Louis doesn’t have the big swings these other markets do because we’re a “steady as she goes” type of market. Investors will be looking for higher-yield opportunities which St. Louis will benefit from because of the affordability and stability of our market.

So, who do you see filling all those new apartments in Clayton?

Andrea Kendrick: I think it will be a combination of demo-graphics. Much of it is driven by the millennials and seniors, whether it’s people retiring or downsizing or young pro-

fessionals looking to move out on their own. Apartment demand is expected to remain steady and occupancy will remain strong.

Mike Donovan: I would suspect that some of those renters that are moving into the nicer and newer apartments are moving out of maybe more antiquated apartment com-plexes. So, I think those are the projects that maybe are going to be the losers, if there are going to be losers. I believe the winners will be the new, highly amenitized proj-ects or the current projects that continue to Invest in ame-nities. I believe the economics are improving and showing a positive trend.


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Tom Bajardi: As for multifamily, I think they’ll pick up a lot of this aging baby boomer population as they decide to downsize from their homes and want to locate in a more urban environment. I think you’re going to see more of those folks that aren’t yet ready for an assisted living facility maybe move into a smaller, highly-amenitized multifami-ly situation so they don’t have to mow a yard or deal with any maintenance items. So, I think multifamily is going to benefit from the baby boomers who don’t want to take care of a house any more.

Andrea Kendrick: I agree with you, Tom. And I think it cir-cles back to why the live-work-play lifestyle is important to many renters. The demand for multifamily and the ameni-ties is both location and technology-driven and people also want the freedom to just pick up and go without having to worry about the maintenance of a home.

Talk about estoppels and non-disturbance agreements.

Melissa Smith-Groff: These are both fancy titles for what should be fairly straightforward documents. Both come up most frequently when financing is being put into place due to a property sale or refinancing is being negotiated. The estoppel certificate should just be a fact check. It’s asking tenants for the facts about their lease and the property. When did you last pay the rent? How much do you owe? Have you modified your lease? Have there been any default issues? It should be a pretty straight-forward document. The need for a subordination non-disturbance agreement arises, because the general rule is that a document “first

in time” controls. An executed lease would control over a loan that is later put into place, because the lease is “first in time.” That isn’t acceptable to a lender. The subordination agreement flips the general rule, and the lease becomes subordinate to the loan. In exchange for a tenant agreeing to subordinate its lease, a lender generally agrees to grant non-disturbance protection to a tenant. With that piece, if a lender later forecloses on the loan, the tenant will not lose their lease or the right to occupy the leased property. This right becomes especially important to a tenant in a market that doesn’t have a lot of available space and rent rates are escalating. I see that in certain markets in St. Louis — Clay-ton for example — and I’m seeing that across the coun-try. Landlords are really more in control, which makes the lender more in control. These documents, which should be fairly simple, do tend to get complicated, because the par-ties attempt to turn them into amendments of the underly-ing lease documents. Lenders will include environmental covenants in the agreements, for example. Those provi-sions have nothing to do with the purpose of either the estoppel certificate or the subordination agreement. New agreements and unrelated concepts should be deleted from these documents.

Tom Bajardi: It’s probably worth noting that any time a tenant gets a request from a landlord to affix their signa-ture to a document, as harmless as it may look on a letter agreement, by affixing your signature, you may be amend-ing or confirming terms of a lease. You should probably send that to your attorney or your real estate broker just as another set of eyes before you sign anything and send it back to the landlord.

Melissa Smith-Groff: Right. Because the estoppel certifi-cate means you’re estopped from later saying it’s not true.

Again, fancy words for simple concepts, but they can turn into complicated documents with big impacts.

Is there an adequate supply of labor for construction in our region?

Bruce Holland: We have a labor shortage in our region. We’re not able to attract enough good people into the con-struction industry. I think that most parents, when they talk to their kids about what they’re going to do and where they’re going to go, they all want them to go to college. And, right now, less than 70 percent who actually go to college make it through. We have a couple different pro-grams with AGC, Illinois and Missouri, to get high school juniors and seniors to take a look at the construction indus-try and other trade schools. Because what we find is that if you really compare what they make, and considering student loans also, a lot of them are going to be much better off going into the construction industry. And a lot of times, they’re graduating from those programs without any debt, especially the apprenticeship programs that are paid for by the unions. So, you could work at the trade and still get your apprenticeship. It’s something that we need to make more people aware of. There’s also not enough project managers and estimators, male and female, to go around. We constantly are going into the schools trying to get interns for the office part of the construction busi-ness as well.

Mike Donovan: Bruce, are labor rates going up?

Bruce Holland: The labor rates don’t go up like material rates because material rates are a supply-demand situa-tion. The labor rates are negotiated. And I will say, in this union environment, we’re fortunate enough that it’s held



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”

In the multifamily industry, we’ve

seen steady cap rate compression, which is why investors find

St. Louis an attractive alternative.

ANDREA KENDRICK, Berkadia

“about to the cost of living increases. So, it’s just a mat-ter of there’s not enough workers out there. The oth-er piece of it is, the opportunities for profits on the subcontractor side of it. Because if they’ve got a lot of work, they’re going to charge more. If they don’t have any work, they’re out aggressively look-ing for it. So, that makes a difference. And I will say that we’re fortunate. We’re in a union environment here, and we can pretty well count on what we’re going to get, what it’s going to cost us, quality of the people and the training and the safety that we get. We’re working on projects out of state, and it’s just the opposite. We have a lot of con-cerns with safety and getting enough qualified workers.

How does the St. Louis market compare with the rest of the country when it comes to commercial real estate?

Mike Donovan: There are good opportunities for out-of-town capital to invest in St. Louis and get a much better return than so many of the currently hot markets. You can buy a qual-ity office building at an eight-and-a-half cap in St. Louis that may be more of a six-and-a-half cap in Atlanta or Bos-ton or a number of other markets. So, there’s an opportuni-ty for buyers to acquire office buildings In St. Louis and get some very good deals. What we lack, in the St. Louis office market specifically, is consistent rent growth. We have had limited rent growth, so that is probably the primary reason why we don’t see as much of out-of-town capital coming to St. Louis as we would like. While the going in yields are very attractive, the profit upon sale can be united due to the low rent growth.

Tom Bajardi: Many of the national funds that were present in St. Louis a decade ago that aren’t here any more have opted to place their new money in the gateway cities: New York, Chicago, San Francisco, Los Angeles, where they see immediate and substantial rent growth. So, when you’re dealing with fund money, a lot of the national players have opted to put their money in markets where they know the rent growth is there for the foreseeable future, and that goes back to one of the reasons why I think we’ve seen more local players in the market since they have the abili-

ty to exit whenever they want, versus being forced to sell when the fund expires.

Andrea Kendrick: In the multifamily industry, we’ve seen steady cap rate compression. Investors find St. Louis an attractive alternative for yield compared to primary mar-kets such as Chicago, Atlanta, or Dallas, for example. In St. Louis, the capitalization rate last year was about 100 basis points higher than the national average. St. Louis hovered




around a 6.5 percent cap while the national average was about a 5.5 percent cap rate. The average price per unit in St. Louis increased from 2016 to 2017 by almost $10,000 per unit to $88,000, but this is still significantly less than the national average of about $145,000 per unit, yet another reason buy-ers like St. Louis.

Tom Bajardi: I think maybe worth mentioning also is that our market is very cyclical. And just because we’ve seen more local players current-ly buy in our market, I think once those gate-way cities and others that maybe see some developers get caught with a spec building that doesn’t go well, or something happens in the financial markets, which leads to a job decline situation, then you might start to see the capital come back to the Midwest where it’s a lot safer of an investment. The one thing about St. Louis versus high growth cities is we don’t get the spikes and the valleys. We’re very, very moderate in terms of our growth, but we’re very moderate on our loss side as well. So, I would see the pendulum swing back in the coming years.

Mike Donovan: We can be a very safe bet because you have very limited oversupply. It’s rare that we have too much product or new spec development. So, in some of the hotter markets, whether it’s Houston or Dallas, they will, every four, five, six years have a lot of over develop-ment, which just depresses the market and rental rates go down and values go down. We don’t really have that issue of oversupply, over development in St. Louis.

Andrea Kendrick: Tom, I thought it was interesting you mentioned there have been more local buyers for office investments in the past year, because that hasn’t been the case for multifamily. We have seen more out-of-state and foreign investors entering the St. Louis market over the past 12 to 18 months. Last year, I brought an investor from Switzerland to St. Louis with their first multifamily acqui-sition in our market, and they’ve since purchased anoth-er deal from me. We’ve also closed about five deals with an Israeli fund in the last 18 months. I find it interesting to see the different classes of commercial real estate attract-

ing different types of inves-tors which include local, for-eign, private and institutional players.

Tom Bajardi: Local investors are vertically integrating. They pay themselves management fees, leasing fees and construction management fees. These investors are effec-tively paying themselves during the hold period versus an out-of-town investor who likely has to pay these fees to a local leasing/management company.

Matt Drinen: As a national firm, our clients are across the country, and we’re always getting calls from clients explor-ing the St. Louis market. They see multi-use projects as attractive investments as the cap rates, yield returns are favorable for these investments. And it’s really a byprod-uct of the economics as I mentioned: lowest unemploy-ment rate in 18 years for St. Louis, developments such as Cortex. These developers see a lot of opportunity for St. Louis in the future. The NGA project is another, by retain-ing 3,100 jobs for the city. It’s a fantastic project. It’s going to be another project that’s going to develop the future of this city.

Bruce Holland: NGA is $1 billion in construction alone, and that will affect the workforce. We also have the continued

building at BJC, the MSD projects, there’s just so much of it all at once. And all the construction on the East Side too continues, especially with the various medial and indus-trial projects.

Tom Bajardi: There’s nobody here to represent the retail perspective, but I’d say big box retail is an asset class that has come under scrutiny with many recent store closings. You’re seeing retail take the brunt because of what Amazon is doing. They’ve been a huge disrupter in retail industry for brick-and-mortar traditional retailers. So, you’re going to see some of those big-box retail spaces that go dark get repurposed and converted into another use.

Bruce Holland: We’ve seen that uptick in the last two years with retrofitting or redoing retail centers. Some of the old, retired ones they’re redoing. New tenants coming in taking smaller spaces and making bigger spaces.

Mike Donovan: Another thing that works for failed retail malls or centers is dense back office users. They need parking, and that’s one thing that retailers have. They’ll have 10 per thousand, or 12 per thousand parking, and it’s been very successful. The Crossings at Northwest Pla-za has been one of the most successful office projects in St. Louis because of the parking density that the landlord can provide.

Tom Bajardi: So, we haven’t talked about the AT&T building downtown yet, but I would envision that asset potentially selling this year. The building was built for a single user. So to multi-tenant the building, which means to break it up for multi-ple users, it is very, very expensive. And the lack of parking for that size building in the downtown market is another challenge. But I believe there is

a buyer for every property at a certain price, and I think that building will sell in 2018.

Mike Donovan: It’s really an opportunity for an employer to potentially come in from out of town that needs a million square feet in a short period of time. Most cities don’t have 1 million-square-foot office towers sitting vacant, so that vacancy may help

attract an out-of-town company to move to St. Louis.

Matt Drinen: It’s either going to take a large company like that to accumulate all that million square foot, or it’s going to be a developer that’s creative and has an idea

of how to split it up and repurpose that use.

”

In 2017, there was 2.1 million square feet of

space in construction. That’s a massive amount of space being built, and

I think 86 percent of it is built to suit.

MATT DRINEN, CliftonLarsonAllen

“

“

”

There are good opportunities for out-of-town capital to come in here and get a much better return than somewhere else.

MIKE DONOVAN, Balke Brown Transwestern


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