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Gateway City Opens Up

APARTMENT FINANCE TODAY • May/June 2010

Lack of new supply, improving jobs picture leads to stabilization in St. Louis this year and growth next year.

BY Sean Fogarty

Big Bucks: The 300-unit Schoettler Village, located in Chesterfield, Mo., which sold in March, was just one of only three sizable sales that have occurred since last August.

Photo: HFF

THE ST. LOUIS ECONOMY has begun to see the light at the end of the recession’s tunnel.

While the next 18 months will continue to be a challenge, there are positive signs that the local apartment market is on its way back. For one, this year will likely see positive job growth for the first time since 2008, according to New York-based market research firm Reis.

Additionally, St. Louis’ manufacturing industry—a key component of the market’s economy—showed positive signs early this year with subsiding job losses. There is uncertainty, however, surrounding the future prospects of St. Louis’ auto manufacturers, as well as aerospace giant Boeing, which employs more than 16,000 workers in the St. Louis area.

St. Louis’ diverse employment base, however, should help to weather any future downsizing on the manufacturing front. The city is home to eight Fortune 500 firms and is also a major medical center market, with BJC Healthcare employing more than 23,000 workers. Additionally, large investment firm Edward Jones employs nearly 5,000 folks in the metro.

Still, with a loss of more than 40,000 jobs in 2009, apartment owners in St. Louis have struggled to hold rents and occupancies. These landlords have both benefited from and been harmed by the current for-sale housing market. On the one hand, many former homeowners have moved to apartments due to layoffs or foreclosures, while many would-be homeowners have been hesitant to purchase a new home in the volatile market. On the other hand, the decreases in home prices—average local pricing decreased from $147,000 in 2006 to $121,000 in 2010—as well as low interest rates and the federal homebuyer tax credit have wooed some first-time homebuyers in the past few months.

Set to Stabilize

Current apartment metrics in St. Louis indicate a stabilizing economy that simply needs time to gain positive momentum. Vacancy rates sit at 9.2 percent, approximately 1 percentage point above the national average. The rate is expected to peak just above that level this year before decreasing. By 2014, the vacancy rate should drop 2.5 percentage points to less than 7 percent, according to Boston-based market research firm Property and Portfolio Research.

Meanwhile, asking rents in St. Louis haven’t declined as much as other Midwest markets or the nation, decreasing just under 1 percent over the past year compared to 1.2 percent in the Midwest and 2.3 percent nationally. The average monthly asking rent in St. Louis stands at $724, according to Reis. To compensate for higher vacancy rates and lower traffic, almost all communities have increased concessions in the past year to attract and sign up residents.

That means the rebound will be gradual in St. Louis, with positive rent growth commencing in late 2010 or early 2011 and moving toward the 2.5 percent mark by 2013, according to Reis. Potential upside to these projections in St. Louis could come in the form of continued lack of new supply to the market, as new construction is virtually at a standstill.

Not only did ’09 see very few new deliveries, but it also continued a trend of very little new product being delivered over the past five years. Deliveries of market-rate rentals in 2009 numbered only 227 units, and the annual average over the past five years has been less than 500 units.

Major new projects have been scarce: The 197-unit 3949 Lindell Apartments in the upscale Central West End was one of the few to deliver over the past year. Other projects have been tabled or cancelled due to overall economic conditions and a lack of construction financing. The near term holds more of the same, with less than 400 units projected to be delivered on average over the next five years. Positive absorption should be back in play come 2011 after being in negative territory for three years.

Transaction Velocity

Transaction activity in St. Louis has been sluggish over the past 18 months. But two major suburban properties recently sold, and the market is expected to pick up steam as local fundamentals improve.

Sean Fogarty is a managing director in HFF’s Chicago office and has completed more than $3.7 billion of multifamily transactions.

Those recent sales may also help to spur the local transactional market. The sales were the 284-unit Charter Place located in Creve Coeur, Mo., and the 300-unit Schoettler Village located in Chesterfield, Mo. Both deals, although separate transactions, closed in March 2010 and were sold free and clear, allowing buyers to take advantage of current favorable financing from the government-sponsored enterprises.

Prior to these recent closings, the only other significant deal to close within the past year was the 694-unit Baxter Crossings located in Chesterfield, which was finalized in August 2009. Taken together, these three deals totaled $88 million in sales price.

More Light Ahead

With positive job growth on the horizon, the St. Louis apartment market is set to see increases in both effective rents and occupancies as we move deeper into 2010.

St. Louis is evolving to a more diverse market, with growth in the city’s research universities, currently employing more than 9,000 workers. Washington University, St. Louis University, and University of Missouri-St. Louis all offer stable, highpaying jobs despite the current recession.

As a result, though slower growth metrics are predicted compared to other major markets, St. Louis’ lack of new apartments puts it in a better position than many metros coming out of the recession.