IN THIS ISSUE

NGZ Works To Build Future For St. Louis Health Center

The Impact a U.S. Recession Would Have On The Retail Industry

Bridging The Gap Through Redevelopment

FOOD DELIVERY AND THE IMPACT ON INDUSTRIAL REAL ESTATE

STRATEGIESCOMMERCI AL REAL ESTAT E INDUSTRY NEWS AND INSIGHTS FROM NEWM ARK GRUBB Z IMMER • VOLUME 5 • ISSUE 1 • FALL 2019

ADDINDICIA

HERE

INDUSTRIAL BROKERAGE

FOOD DELIVERY AND THE IMPACT ON INDUSTRIAL REAL ESTATE

E-Commerce has reshaped consumer experience with its impact on virtually every industry. The food industry, however, despite being one of the largest categories of consumer spending, has been slow to react to the results of e-commerce. Most of this can be attributed to the perishable nature of food products and the lack of an efficient supply chain that could deliver food quickly to the consumer.

Recently, though, the food industry has picked up momentum in embracing e-commerce as part of its business model. With this changing dynamic in the industry, there has been a substantial impact on the industrial commercial real estate market.

The primary driver of this trend has been the consumer demand for delivery services, including the delivery of food. The delivery of food and its impact can be broken down into two categories: delivery of traditional restaurant food and the delivery of groceries.

Restaurants delivering food is nothing new to the market. However, it has generally been a challenge for restaurants to maintain profit margins on deliveries, while at the same time paying a premium in rent for prime retail space.

Furthermore, as more restaurants outsource their delivery and adopt app-based services such as Uber Eats, Postmates or Grubhub, the increased demand can put a strain on the capacity of the storefronts kitchen operations. Several startups and investors see a solution to this problem in what is known as ghost kitchens.

Ghost kitchens are restaurant locations that only handle delivery orders and are typically found in light industrial areas with proximity to customers.

The rent at these operations is substantially lower than a storefront location, coupled with low labor expenses due to the absence of staff. Additionally, these locations usually offer easy access and loading for delivery drivers, thus reducing delivery time and increasing volume.

One company looking to capitalize on this trend is CloudKitchens. A Los Angeles-based startup, backed by Goldman Sachs, CloudKitchens has acquired ten industrial properties since 2017 and plans to expand globally, according to the Wall Street Journal.

While entrepreneurs and startups are looking "bigger," local property owners of flex space might see an

opportunity to take advantage of this trend with remaining vacancies, especially those located close to highly populated areas.

Owners might consider marketing their space to potential ghost kitchen users, which could also result in more premium rental rates.

While ghost kitchens may be more fitting for smaller industrial or flex spaces, grocery delivery is having an impact on the large-user industrial market.

Grocery delivery, or e-grocery, has been on the rise over the past several years. According to the Food Marketing Institute, groceries ordered online will account for 13 percent of total grocery sales by 2022, which is up from 3 percent in 2018, and could total as much as $100 billion by 2024. With this upward trend for e-grocery services, increased demand for cold storage industrial facilities has become evident.

Traditionally, cold storage industrial buildings have been considered a specialty sub-sector dominated by build-to-suit development for owner-occupiers or third-party logistics operators. This specialty sub-sector is a result of high construction costs, ample power needs, and government approval obstacles for cold storage facilities.

Currently, according to the USDA, there is approximately 180 million square feet – or around 3.6 billion cubic feet – of cold storage capacity in the United States. However, supply still lags behind demand. In response, several investors have taken significant stakes in this market.

In May of 2018, private equity firm Blackstone purchased a 2.3 million square foot portfolio of nine primarily cold storage facilities for $255 million at a 6.25 percent cap rate. BentallGreenOak, a real estate investment advisor, has plans to develop a $50 million refrigerated warehouse in Savannah, Georgia.

Last summer, Hunt Southwest Real Estate Development broke ground on one of the first cold storage facilities built on a speculative basis: a 300,000 square foot multi-tenant building in Fort Worth, Texas. With rent figures ranging between $16 and $24 per square foot – three to four times that of traditional industrial space – the industrial market will likely continue to see more speculative development or conversion of older vacancies to cold storage in the coming years.

It is no question that e-commerce has become a part of our everyday lives. As it continues to impact the food industry, the industrial real estate market and its owners and investors will have the opportunity to capitalize on this trend for several years to come.

SEAMUS MCLAUGHLINAssociate – Industrial BrokerageNewmark Grubb Zimmer | Kansas City

50%

40%

30%

10%

0%

-10%

20%

1Q19

3Q18

1Q18

3Q17

1Q17

3Q16

1Q16

3Q15

1Q15

3Q14

1Q14

3Q13

1Q13

3Q12

1Q12

3Q11

1Q11

3Q10

1Q10

3Q09

1Q09

3Q08

1Q08

3Q07

3Q01

1Q07

1Q01

3Q03

3Q02

1Q04

3Q05

1Q05

3Q04

3Q06

1Q06

1Q03

1Q02

U.S. E-Commerce Growth Rate

Source: marketplacepulse.com

12.5%

10%

7.5%

2.5%

0%

5%

U.S. E-Commerce Sales as a Percent of Total Sales

Source: marketplacepulse.com

4Q99

3Q00

2Q01

1Q02

4Q02

3Q03

2Q04

1Q05

4Q05

3Q06

2Q07

1Q08

4Q08

3Q09

2Q10

1Q11

4Q11

3Q12

2Q13

1Q14

4Q14

3Q15

2Q16

1Q17

4Q17

3Q18

2Q19

Source: CoreSight

3,231

-7,922

2019 (YTD)

3,745

-5,589

2018

5,094

-7,941

2017

5,477

-5,121

2015

5,962

-4,949

2014

5,577

-4,210

2016

5,712

-4,356

2013

5,359

-2,964

2012

Store Closings

Many point to 2017’s record number of store closures as the most profound example of the changing landscape in the 21st century U.S. retail sector. However, the underlying paradigm shift can be traced back a decade as the result of the U.S. Economy navigating its way out of the fallout of the Subprime Mortgage Financial Crisis of 2008.

The Gross Domestic Product (“GDP”) expansion that began the U.S. economic turnaround in Q3 2009 coincided with widespread smartphone adoption, and improved e-commerce logistics.  

This expansion allowed for a drastic reduction in shipping timeframes, and many other important factors that empowered the end consumer to, at the very least, consider alternatives to brick and mortar shopping.

In the ten years since that economic turnaround began in late 2009, two critical notions are indisputable:

1. Since Q4 2009, E-commerce revenue has seen double-digit growth every quarter, which significantly outpaces brick and mortar sales growth.

2. The U.S. has seen store closings surpass store openings for ten consecutive years, with 2019 on the path to potentially eclipse 2017 for the record year of annual store closings. 

If estimates are accurate that 2019 could be a record-breaking year for U.S. store closures, then it is evident that the retail industry’s decade-long failure to adequately adapt to e-commerce has not yet reached an inflection point. 

If the outlook has been this bleak for brick and mortar retail locations during the longest expansion in the history of our economy going on 121 consecutive months, are we still waiting for the other shoe to drop if our economy heads into a recession?

While an economic recession would not be ideal for brick and mortar retail, the same can be said about any industry.

However, it has become increasingly apparent that retailers are trying to insulate themselves from an economic downturn by combining elements of both digital and physical goods browsing to elevate the overall health of their businesses by growing alongside pure e-commerce competition.

This strategy sees businesses invest heavily in their digital platform to, at a minimum, provide an alternative buying option to their customers.

A follow-on tactic to this couples the digital initiative with a “showroom” model whereby companies with a strong online platform include a physical store(s), albeit with space requirements that are much smaller than traditional retail stores.

This strategy provides the dual benefit of giving clients an in-store experience while also reducing occupancy costs for the business.

However, for businesses that are struggling financially, they may not have the funds necessary to invest heavily in an online platform, and a full-blown recession might even test their ability to service debt obligations.

More drastic measures to stabilize the financial health of a company involve assessing whether any real estate assets within the portfolio could restructure through lease termination, lease renegotiation, and/or disposition. 

These initiatives emphasize rent and operating expense (“OpEx”) reduction that would boost the profit margin of the business and ultimately give it a better chance to navigate through a sustained period of economic downturn successfully.

GLOBAL CORPORATE SERVICES

GRAHAM STARKAssociate – Global Corporate ServicesNewmark Grubb Zimmer | Kansas City

BRIDGING THE GAP THROUGHREDEVELOPMENT

GLOBAL CORPORATE SERVICES

ST. LOUIS CITY

DOW

NTOW

N ST

. LOU

IS

ST. LOUIS COUNTY

ST. L

OUIS

CIT

Y BJC HEALTHCARE WASHINGTON UNIVERSITY

MEDICAL CAMPUS

CORTEX DISTRICT

CITYFOUNDRY

ARMORYDISTRICT

SSM HEALTH ST. LOUIS UNIVERSITY HOSPITAL

MLSSTADIUM

UNIONSTATION

ENTERPRISECENTER

BALLPARKVILLAGE

GATEWAYARCH

FOREST PARK

Major League Soccer is heading to St. Louis and the proposed stadium is only one of the recent projects in line for redevelopment that’ll rejuvenate the city that has witnessed development idled for decades.

The proposed 22,500 seat stadium, expected to cost $250 million, will sit adjacent to Union Station in the City’s Downtown West neighborhood. The stadium site will effectively bridge Downtown into Midtown, continuing the wave of momentum for Midtown development projects, which have arguably been the catalyst for the city’s revitalization.

Once completed, it will cap off a new corridor of sports and entertainment attractions spanning east to west from the recently remodeled arch grounds to Forest Park. Along this corridor sits billions of dollars of new real estate investment helping reignite and shape the future of the city.

GATEWAY ARCH PROJECT: Completed in 2018, this $380 million renovation included the addition of a new outdoor park and the expansion of the Arch museum.

BALLPARK VILLAGE PHASE II: Scheduled to complete in 2019, the $260 million project is roughly five times the scale of Phase I completed in 2014. The project totals 550,000 square feet consisting of a 29-story residential tower, the first Class A office tower completed in the city in three decades, and several other planned retail spaces.

ENTERPRISE CENTER: Phase three has begun on the Blues arena, three-year, $150 million renovation project.

UNION STATION: A $160 million redevelopment is underway that includes a 200-foot-tall observation wheel overlooking the city skyline, a 120,000 square foot – 1.3-million-gallon aquarium, and significant hotel and lobby renovations.

ST. LOUIS UNIVERSITY HOSPITAL: The new $550 million 800,000 square foot hospital and care center are set for completion in 2020.

ARMORY DISTRICT: The redevelopment of the Armory building. A 260,000 square foot mixed-use building, originally constructed in the 1930s.

This $83 million project, set to complete in 2020, will consist of 160,000 square feet of creative office space and supporting amenities, along with plans to develop the 7 acres surrounding the Armory building for residential use.

CITY FOUNDRY:  Scheduled to open in 2020, this $220,000 million redevelopment will include the city’s first food hall concept featuring local restaurants, a grocery store, movie theater, and office space.

CORTEX: The continuation of the successful 200-acre Cortex innovation district redevelopment will now include a 320,000 square foot, $115 million office building. Since 2002, Cortex has seen more than $500 million in real estate investment.

BJC HEALTHCARE AND WASHINGTON UNIVERSITY SCHOOL OF MEDICINE:

This 10-year project has revamped much of the 16-block medical campus located in the City’s Central West End. The project is estimated to cost $1 billion in total and include 266,000 square feet of renovations and 1.5 million square feet of new construction.

ANDY DOYLE Managing Director – Global Corporate ServicesNewmark Grubb Zimmer | St. Louis

Renderings by : Clockwork Architecture + Design

For the last five years, Newmark Grubb Zimmer has been working with CareSTL Health to expand their physical footprint throughout Northern St. Louis. CareSTL Health is a Federally Qualified Health Center (FQHCs or a Community Health Center-CHC). The community-based healthcare system provides medical care to underserved, underinsured, and uninsured populations in North St. Louis, one of the most economically distressed communities in the country.

The Public Sector Consulting division provides a broad cross-section of real estate advisory services to include market and financial feasibility analysis, public participation and outreach to federal, state, local, and philanthropic organizations, site selection and ground assemblage services, and incentive application preparation and follow-up services.

Additionally, NGZ will provide owners representative development services for the anchor facility for the multi-structured wellness campus invasion by the Chief Executive Officer, Angela Clabon.

“Our newly proposed wellness campus will not only provide top-notch healthcare to the community, but serve as a catalyst for further economic and community development.” said Clabon.

Under Mrs. Clabon’s direction, the project has already received a sizable tract of land from the city as well as an allocation of New Market Tax Credits towards the project.

NGZ has also served as owner’s representative for the $25,000,000 building of the 60,000 square foot Samuel Rodgers Community Health Center in Kansas City, Missouri. The CareSTL Health project will be a replica of the Samuel Rodgers Health Center.

NGZ WORKS

TO BUILD FUTURE FOR ST.

LOUIS HEALTH CENTER

PUBLIC SECTOR CONSULTING

DR. TROY NASHManaging Director, Principal – Public Sector ConsultingNewmark Grubb Zimmer | Kansas City

CHRISTIAN ROUSTICAssociate – Public Sector ConsultingNewmark Grubb Zimmer | Kansas City

Today, Newmark Grubb Zimmer is an organization comprised of people with wide expertise, practical education and experience ranging from bachelor’s degrees, master’s degrees and doctorates. Our degrees and expertise encompass a variety of industries including real estate, architecture, engineering, law, construction, economic development, finance, economics and marketing.

NGZ strives to achieve excellence not only for our clients and vendors, but also internally with a strong group of dynamic people. We continue to attract and develop a winning team. It is our pleasure to introduce some new faces.

TREY DEROUSSEAssociate, Sales & Leasing

Trey DeRousse joined NGZ in 2019 and currently serves as an associate in the company’s Kansas City, office. His primary responsibilities include sales and leasing of office properties in the Kansas City area, with a focus on Eastern Jackson County. Mr. DeRousse is well versed with all significant building tenants, owners, lease expirations, and transactions in his territory.

CANNON TEAGUEAssociate, Sales & Leasing

Canon Teague joined NGZ in 2019 and currently serves as an associate in the company’s Kansas City office, where he focuses primarily on properties located in South Kansas City. Mr. Teague is intimately familiar with all notable building tenants, owners, lease expirations and transactions in his territory.

MEET OUR TEAM

Newmark Grubb Zimmer is continuously monitoring market indicators, tracking and analyzing supply and demand drivers, cyclical patterns and industry trends. As Newmark Grubb Zimmer continues to evolve its presence in Kansas City and St. Louis, NGZ research now offers its clients an industry-leading analysis of current and relevant industrial, office and retail conditions. Rather than relying on third-party data sources, our data acquisition efforts involve inputs from advisors in the field, analysts and brokers executing transactions.

MARKET REPORT DATA IS CURRENT AS OF 3Q19For the most up-to-date information, visit ngzimmer.com

Average Asking Rent (Price/SF)

Vacancy Rate (%)

Net Absorption (SF) – Quarterly

NATIONWIDEST. LOUISKANSAS CITYINDUSTRIAL MARKET

$8.68$4.72$4.72

5.0%5.5%5.8%

27,648,460250,213(728,327)

Average Asking Rent (Price/SF)

Vacancy Rate (%)

Net Absorption (SF) – Quarterly

NATIONWIDEST. LOUISKANSAS CITYRETAIL MARKET

$21.33$13.27$13.16

4.5%4.7%5.4%

11,752,654133,350(108,820)

Average Asking Rent (Price/SF)

Vacancy Rate (%)

Net Absorption (SF) – Quarterly

NATIONWIDEST. LOUISKANSAS CITYOFFICE MARKET

$28.95$20.59$20.85

9.5%10.8%8.3%

14,511,872(231,588)(244,926)

OFFICE MARKET:Kansas CityThe Kansas City office market continued strong as it realized its 24th consecutive quarter of increasing asking rental rates in the third quarter of 2019. Although the market experienced negative 244,926 square feet of net absorption, limited deliveries of new product to the market kept overall vacancy at a near-record low of 8.3%. Leasing opportunities for Class A space will remain tight in the North Johnson County, South Kansas City, Southeast Jackson County and Wyandotte County submarkets, where vacancy currently ranges from 0.0% to 4.3%. Overall market vacancy should range from 7.8% to 8.7% during the next four quarters, while average asking rental rates should keep trending upward and are expected to range from $20.45/SF to $21.20/SF.

St. LouisThe St. Louis office market slowed in the third quarter of 2019, as negative 231,588 square feet was absorbed. With year-to-date net absorption totaling negative 505,636 square feet, average quarterly total net absorption has fallen significantly, measuring negative 8,973 square feet over the past two years. The market has benefited from both out-of-town and local investor interest, as various single and multi-tenant buildings successfully traded in the third quarter of 2019. As Class A vacancy rates fell to 3.4% and 5.3%, expect few opportunities for prospective tenants in the Clayton and South County submarkets respectively. Overall market vacancy should range from 10.2% to 11.2% while asking rental rates is expected to range from $20.35/SF to $21.00/SF during the next four quarters.

INDUSTRIAL MARKET:Kansas CityThe Kansas City industrial market slowed in the third quarter of 2019, as negative 728,327 square feet of net absorption was posted. However, positive net absorption has occurred in 29 out of the past 31 quarters with quarterly absorption averaging 1.2 million square feet during the past three years. The overall marketplace continues in the tenants’ favor, with properties offering a variety of concessions. The pace of industrial development has adjusted, with the market realizing a decrease in under construction activity of 43.0% in the past year and 61.8% over the past two years, based upon overall square footage. Vacancy should hold steady in the 5.3% to 6.1% range throughout the next four quarters, as a portion of the 2.3 million square feet of product currently under construction delivers to the market.

St. LouisThe St. Louis industrial market slowed in the third quarter of 2019, as 250,213 square feet was absorbed; down from a quarterly average of 1.1 million square feet during the past three years. However, asking rental rates have increased in 15 out of the past 19 quarters with positive net absorption occurring in 21 out of the past 24 quarters. Developers continue to announce major projects in the market with the latest announcement coming from the Opus Group’s new speculative, Class A, 155,000 square-foot facility at Soulard Business Park. Vacancy should hold steady in the 5.2% to 5.9% range throughout the next four quarters with average quoted rental rates to range from $4.69/SF to $4.87/SF.

RETAIL MARKET:Kansas CityThe overall Kansas City retail market loosened year-over-year in the third quarter of 2019, realizing a 10-basis-point increase in vacancy to 5.4%. Net absorption totaled 266,509 square feet for the past four quarters and 1.4 million square feet for the past two years, indicating a sound but slowing market. The average quoted rental rate measured $13.16/SF, down $0.81/SF from one year ago.

St. LouisThe overall St. Louis retail market remained flat year-over-year in the third quarter of 2019, measuring 4.7% total vacancy. Net absorption totaled 177,531 square feet for the past four quarters and 587,444 square feet for the past two years, indicating a sound but slowing market. The average quoted rental rate measured $13.27/SF, up $0.10/SF from one year ago.

MARKET REPORT ANDREW GARTENDirector, Research

Newmark Grubb Zimmer

IAMCFall 2019 Professional Forum Milwaukee:September 14th-18th

SIOR Development DayKansas City:September 26th

SIOR2019 FallWorld ConferencePortland:October 17th-19th

CORENET Global Summit –North AmericaOrange County: October 20th-22nd

ABOUT NEWMARK GRUBB ZIMMER

Newmark Grubb Zimmer is a full-service commercial real estate company that provides a range of services including sales and leasing, property and facilities management, global corporate services, and investment sales and capital markets. We also specialize in owner’s representative services for public and private development projects and public sector consulting.

NGZ is regularly recognized as one of the top brokerage firms in the region, negotiating more than 500 transactions per year. The firm currently manages more than 10 million square feet of office, medical, industrial, retail and educational property and serves as corporate real estate advisor for an assortment of local, regional, national and international companies.

NGZ’s approach provides clients with real estate solutions that deliver quantifiable results. Our offices are located in Kansas City, Missouri; St. Louis, Missouri; and

Lee’s Summit, Missouri. As an affiliate company of Newmark Knight Frank (NKF), yet still independently owned and operated, the NGZ Team leverages the breadth and depth of the NKF platform to offer its services throughout the Midwest, the United States and around the globe.

Newmark Knight Frank is one of the world’s leading commercial real estate advisory firms. Together with London-based partner Knight Frank and independently-owned offices, NKF’s over 16,000 professionals operate from more than 430 offices in established and emerging property markets on six continents. NKF’s full-service platform comprises BGC’s real estate services segment.

LOOK FOR US AT THESE CONFERENCES:

KANSAS CITY, MO1220 Washington StreetSuite 300Kansas City, MO 64105816.474.2000

ST. LOUIS, MO8235 Forsyth Boulevard Suite 310Clayton, MO 63105314.254.4600

EASTERN JACKSON COUNTY1485 SW Market StreetLee’s Summit, MO 64081816.474.2000

SALES & LEASING

PROPERTY & FACILITIESMANAGEMENT

DEVELOPMENT MANAGEMENT

GLOBAL CORPORATE SERVICES

INVESTMENT SALES &CAPITAL MARKETS

PUBLIC SECTOR CONSULTING

SALES & LEASING

Justin BealDirector

Mark C. Long, SIOR, CCIM, LEEP APPresident and Chief Executive Officer

Brad Ashley, CPM, RPAManaging Director

Daniel F. MusserExecutive Managing Director, Principal

Matthew D. McFaddenExecutive Managing Director, Principal

Michael VanBuskirk, SIOR, CCIM, CREExecutive Managing Director, Principal

Dr. Troy Nash, JD, PHDManaging Director, Principal

Mike Carlson, SIOR, CCIMExecutive Managing Director, Principal