The nation’s Midwestern cities, including St. Louis, are among the markets showing the most momentum in the multifamily sector. Why? The singlefamily sector here generally didn’t get overbuilt to the degree seen elsewhere.

“The shadow market competition from single-family rentals, so common in much of the nation, isn’t showing up in the Midwest,” said Greg Willett, vice president of research and analysis for M/PF YieldStar, a real estate research firm based in Carrollton, Texas. And developers working in the market have a response for those who argue that St. Louis hasn’t exactly witnessed blazing job growth.

“[St. Louis’] economy isn’t fast growing, but it hasn’t seen the expansion pace cool to the degree noted in most places.” said Willett.

Riverboat casino being built

The leisure and hospitality sector is expanding rapidly here due to the gaming industry. In South St. Louis, apartment owners will likely get a boost from the construction and operation of Pinnacle’s new River City Hotel and Casino. Two thousand permanent positions are expected to open up when the riverboat casino is completed next year.

St. Louis is expected to receive the attention of out-of-state investors looking for favorable cap rates. In the third quarter of 2007, cap rates here were in the low 7 percent range.

“St. Louis is not a land of extremes,” said Sam Chandan, chief economist with Reis, Inc., a New York City-based real estate research firm. “It’s a very stable market. The apartment market has seen gains, only muted, but they are gains.”

Demand is up, construction down

Tightening conditions are expected to improve St. Louis’ apartment climate in 2008, reports real estate brokerage firm Marcus & Millichap.

Many homeowners with adjustable-rate mortgages are facing foreclosure and are expected to seek rental housing. And even though demand is increasing, developers have been slow to add more units to the market, setting the stage for healthy rent increases.

Developers are expected to deliver 550 units in 2007, a modest increase of 0.5 percent compared to 2006.

St. Louis experienced fairly strong construction activity for the past five years, noted Chandan, although that was likely because of low land prices.

The largest project delivered so far this year was the 266-unit O’Fallon Lakes Apartments in the St. Charles County submarket. That was a $25 million affordable housing development built by Gundaker Commercial Group.

In 2007, rents are forecast to increase at the highest rate in five years. Asking rents are expected to finish the year at $719, and effective rents are forecast to reach $680 by year-end. Those numbers would represent annual gains of 2.7 percent and 3.3 percent, respectively, according to Marcus & Millichap.

Class A properties witnessed a 1.7 percent gain in asking rents in the third quarter of 2007.

In the Class B and C sector, where competition with the for-sale market is minimal, apartment owners recorded a 2.3 percent asking rent gain in the third quarter of 2007. More buyers are expected to target Class B and C assets located around the airport submarket in St. Louis, where there are few housing options for local workers.

“This isn’t a market that’s going to make headlines,” said Chandan. “For a lot of investors looking for a steady market, that’s not a bad thing.”