ABC Finance

The downtown St. Louis turnaround that seemed just around the corner last fall may take longer than many had hoped.

As the echoes continue to reverberate over Centene Corp.’s decision not to move its headquarters downtown, at least one area economist predicts trouble ahead. Indeed, the warning bells have been sounding for a while.

Money for all types of projects is drying up, sales of condos and lofts have slowed, and retailers are holding back on expansion plans.

Projects not already committed to a schedule will probably not get started until at least the end of the year, said Don Phares, professor emeritus of economics at the University of Missouri-St. Louis.

"Best-case scenario is (development) is going to slow down substantially," Phares said. "Worst-case, it will be put on hold until (the national) financial environment gets straightened out."

Although downtown may not appear to be crucial in a region that’s sprawling eastward and westward, its fate is critical, said Bob Lewis of St. Louis-based Development Strategies Inc., an economic development consulting company.

"People form their opinions of a region based on the central downtown," Lewis said. "If downtown St. Louis looks like it is disinvested, that’s the first thing you notice about the region."

The entire region will thrive if downtown does, he said.

But downtown has long faced distinct challenges: obsolete buildings, the difficulty of assembling land for large projects, and competition from cheaper, easier-to-develop suburban sites.

"If St. Louis had constraining factors that prevented sprawl, that would give downtown an advantage," Lewis said.

HURT BY ECONOMY

Tax incentives have helped offset some of those hurdles. But now the national economic slowdown is exacerbating downtown’s troubles.

One example is the Mercantile Exchange, a six-building mixed-use development by St. Louis-based Pyramid Cos. in the heart of downtown. Pyramid is looking to receive more than $100 million in tax incentives, but it has not secured private funding.

The start of construction was moved to June from an initial February date.

Lenders are raising their credit and pre-leasing requirements, said John Steffen, Pyramid’s president and chief executive, and the decision to delay construction was made partly for that reason. Sales at the company’s two other downtown projects — the Arcade building and Dorsa Lofts, both mostly residential — also have slowed, Steffen said.

Indeed, the once-booming downtown residential market has cooled considerably.

Over the past two years, 2,500 new rental and for-sale units were added to the 4,746 already in downtown, according to the Downtown St. Louis Partnership. Only 298 new units are expected to be added this year, said Jim Cloar, executive director of the partnership us fast cash.

"I have never built condominiums before so I have nothing to compare sales to, but the pace is slower than I would have expected," said Craig Heller, managing partner of St. Louis-based LoftWorks LLC, which is developing the Syndicate building.

Steve Smith, a partner in the St. Louis-based Lawrence Group, said he was "cautiously optimistic" about condo sales at his firm’s Park Pacific project.

"If we can get the building built, we will get the condos sold," he said. "Because housing prices are slowing, the psychology of the buyer is to wait and see if it becomes cheaper."

The big worry, however, isn’t for projects with financing committed, but for those without such money deals, Smith said.

"Projects have to have a much higher level of pre-sales or pre-leasing, and lenders are being much more conservative about the underwriting," Smith said. "It is going to be much more difficult to get a new project off the ground."

One victim appears to be a boarded-up building on 14th Street, which was to be converted, starting a year ago, into Ford Condominiums. The developer, Mambo Development of Kirkwood, did not return calls for comment.

Condo and loft prices are falling along with the pace of development, said Lewis.

"The last thing developers want is inventory sitting on their hands, so they will take a hit, sell at a lower price or give concessions," Lewis said. "We are starting to see that."

He also expects some for-sale units to convert to rentals until the housing market picks up.

RETAIL UNCERTAINTY

In the meantime, efforts to boost downtown retailing will prove difficult as the economy and residential development slow.

"Retailers are being squeezed," Lewis said. "They are not going to be doing much expansion in the short term. Certainly not in an untested kind of market."

Downtown suffers, he said, because its customer base is fragmented among downtown workers, visitors and residents.

"There isn’t one solid market base," Lewis said. "You have to add up (several) market segments, and I suspect retailers are not willing to take the risk right now."

The downtown slowdown, while unnerving in the short term, will help in the long run by taking some of the weaker players out of the market, said Richard Ward, vice president of Zimmer Real Estate Services, based in St. Louis.

"You have to have some attrition, and the outcome of that can be very positive," he said.

Bigger developers with staying power will be ready to pounce once the market improves, Ward said.

That’s what Clayco Corp., based in Overland, is hoping to do with its long-awaited Bottle District project near the Lumi

Filed under: finance by Specialist