The bloom has not yet rubbed off St. Louis. Even though contracting payrolls will cause fundamentals in the St. Louis apartment market to weaken this year, the metro’s colleges and universities will continue to be a steady source of demand. For instance, expanding enrollment figures at St. Louis University and Washington University will help lead to some operational improvements locally, particularly in the lower tiers. Class B and C vacancy rates in the City North and Clayton/Mid-County submarkets, for example, are expected to outperform other areas. Metro-wide, Class A conditions will be affected by a rise in completions this year, though this trend will be most pronounced around the downtown area, where multifamily construction has been elevated. Meanwhile, job losses are expected to accelerate in the manufacturing and distribution sectors. Now, local officials are attempting to lure growth industries: In St. Charles County, for instance, officials are courting alternative energy companies by streamlining lending applications and the ongoing funding of a local technology-based business incubator.

Overall, the multifamily landscape in St. Louis has its fair share of challenges, but mid-tier owners and managers still say the Midwest city is ripe for opportunity.

Soft Landing

Unfortunately, certain market fundamentals are cause for concern. Looking at the numbers, St. Louis-area employers have shed roughly 34,000 jobs in the past 12 months, thinning payrolls by 2.5 percent, the largest annual contraction in nearly 30 years. Losses have accelerated recently, as 31,800 jobs were cut over the past two quarters.

In particular, the trade, transportation, and utilities segment remains weak. During the past year, this sector decreased capacity by 4.1 percent, or about 10,700 jobs. Cuts in the professional and business services sector are also expected to increase in the second half of the year, driving down total employment by 3.5 percent. These job losses have driven vacancies up 120 basis points (bps) to 8.2 percent in the first quarter. A spike in completions in the second half is expected to increase metro-wide vacancy levels by 130 bps this year to 8.9 percent. In 2008, vacancy rates rose 80 bps.

ON SALE: The recently renovated, 36-unit Chesterfield Parkview Townhomes in Chesterfield, Mo., is on the market for $110,000 a unit.
ON SALE: The recently renovated, 36-unit Chesterfield Parkview Townhomes in Chesterfield, Mo., is on the market for $110,000 a unit.

On a year-over-year basis, vacancies in the top tier rose by 50 bps to 7.8 percent in the first quarter. That’s been partly stemmed by foreclosed-upon homeowners transitioning into apartments, which has kept demand for Class A buildings healthy. Class B and C properties have not been as lucky: After reaching an all-time low in the first quarter of 2008, Class B and C vacancies jumped 150 bps to 8.4 percent in the first quarter of 2009, relatively in line with the sector’s historic average. Rising vacancies have caused revenues to contract for the first time since 2004. Apartment properties posted a 1 percent retreat in metro-wide revenues during the most recent 12-month stretch, after revenues expanded 3.8 percent in the prior year. New space premiums will not be enough to outweigh ongoing weakness in the local labor market. As such, St. Louis has seen rent growth slip to the slowest annual pace recorded in more than five years. Asking rents ended the first quarter at $728 per month, while effective rents were $682 per month, resulting in annual gains of 1 percent and 0.3 percent, respectively. Rents are forecast to end 2009 at $720 per month, a 1.2 percent decrease, while effective rents will fall by the end of 2009 by 2.3 percent to $670 per month.

Despite the job losses, demand for Class A units has been relatively consistent over the past year, allowing for modest rent gains: Class A asking rents rose by 1.1 percent to $914 per month in the first quarter. As such, the average top-tier asking rent is currently $335 per month higher than the typical mortgage payment for the metro’s median-priced home.

Slow Build

In St. Louis, construction activity still remains minimal, as developers have added only 84 units to local inventory during the past year, following the completion of 66 units in the previous 12-month period. In downtown, the former Cochran Gardens neighborhood is being revitalized into a mixed-income community. The work is highlighted by the redevelopment of the city’s first high-rise towers, which will add 102 units to the St. Louis City North submarket in the third quarter of 2009.

Supply-side pressure in the City North area will increase slightly this year as a result. The metro’s largest apartment project (due to deliver in ’09) is also located in the submarket, and developers also have nearly 350 condos slated to come online this year, some of which may be deployed as rentals. Last year, only 84 units were completed in the metro, while 340 units are scheduled to open in ’09, expanding stock by 0.3 percent. Although the additions to apartment stock in the past year were minor, projected growth of the key renter cohort—those ages 20 to 34—coupled with a steady decline in multifamily permit issuance, will help balance apartment supply and demand in the coming years.

Also noteworthy is that the past 12 months saw single-family permits drop 44 percent to roughly 4,200 units. Nearly 700 multifamily permits have been pulled in that time, marking a 53 percent decrease. Simultaneously, the median home price fell 10.6 percent year-over-year to $119,000 in the first quarter. Despite a 5 percent retreat in the metro’s median income levels, there is still a $19,700 surplus needed to qualify for a mortgage on a median-priced home.

Local Flavor

Elevated activity from local and regional investors has helped offset a decrease in out-of-state buyers, who are wary of fundamentals in the metro. In addition, many out-of-state owners have struggled to set up 1031 exchanges, since finding buyers is difficult. The reduced number of listings that meet their investment goals in St. Louis is also limited. This trend is expected to continue through 2009, with local and regional investors targeting mid- and lower-tier assets in prime locations.

In the past 12 months, transaction velocity overall has slowed moderately but is expected to pick up in the coming quarters as the ask/bid gap continues to narrow and sellers adjust pricing strategies to attract offers. Cap rates for these mid-tier properties currently are in the high-7 percent to low-8 percent range, in line with the metro’s average. During the past year, the median price was approximately $46,000 per unit, roughly in line with the prior period.

Buyers seeking distressed properties will likely find assets downtown, primarily in stalled or reverted condo projects. Repositioning opportunities will arise, too, as demand is expected to regain momentum when the economy rebounds.

And, by then, St. Louis should be back in full bloom.

Fast Facts:

St. Louis*

Population:2.86 million
Occupancy: 91.4%
Median Age: 33.7
Median Household Income: $45,863
Effective rent: $671
Unemployment: 10.2%
Notable: St. Louis, known as “The Gateway to the West,” ranked as the ninth-most literate city in 2008. The city is birthplace of the ice cream cone, which was invented at the St. Louis World’s Fair in 1904 when a vendor ran out of cups and asked a waffle maker to roll up waffles to hold ice cream.

* 2009 figures, as forecasted
Sources: Marcus & Millichap,, Reis