COVID-19 Shines Light on Midwest Markets

Bobby Mills and Andrea Kendrick of Berkadia explain what’s behind St. Louis’ strong multifamily performance.

St. Louis. Image via

St. Louis. Image courtesy of Alexander Schettino via

Thanks to its diverse economic profile, St. Louis was able to withstand the COVID-19-induced uncertainties over the past year. Although the metro lost some 84,000 jobs during the 12 months ending in February, the unemployment rate stood at 5.1 percent, below the 6.6 percent national figure, according to preliminary data from the U.S. Bureau of Labor Statistics.

Due to strong economic fundamentals, the multifamily market in St. Louis also proved resilient and remained active throughout the health crisis. “Multifamily valuations are as strong as we have ever seen them. Rent growth continues and interest rates remain historically low, which, in turn, causes valuations to increase,” said Bobby Mills, director at Berkadia.

In the interview below, Mills and Berkadia Senior Director Andrea Kendrick provide a broad picture of the current state of multifamily in St. Louis and discuss where the market is heading.

READ ALSO: Pandemic Impact on Multifamily Lease-Ups

How would you describe St. Louis’ multifamily market before the pandemic? How do you see the market now?

Andrea Kendrick, Senior Director, Berkadia. Image courtesy of Berkadia

Kendrick: The St. Louis multifamily market pre-pandemic was very healthy. We experienced record-high occupancy trends, rent growth average of more than 3 percent and even greater growth in certain submarkets, and record pricing in transactions. In general, these trends have continued through the pandemic.

Although nearly every market across the country experienced some form of change, St. Louis has a robust economy due to a diverse employment base where three of our top five employers are in the health-care sector. There is also a significant financial services and manufacturing industry based in St. Louis.

Mills: Effective rents are projected to increase 2.5 percent to $1,001 from one year ago, with select submarkets achieving 5 percent rent growth. Further, collections have remained stable at 93 percent, and, while occupancy took a slight dip, it remains historically high at 95 percent. This can be attributed to St. Louis’ resiliency to the pandemic and its heavy concentration of “recession-proof” employment.

Which aspect of St. Louis’ multifamily sector has been most affected by the health crisis and why?

Mills: New development activity was most affected by the pandemic. St. Louis has experienced a surge of new development over the past five years, with approximately 2,000 units that came online in 2020 and another 1,200 units that will begin lease-up over the next few quarters. However, during the pandemic, developers have seen construction costs continue to increase and have had a more difficult time sourcing materials due to many shipping delays.

Kendrick: Chesterfield, a western submarket of St. Louis County has seen a large uptick in new multifamily construction, with the delivery of more than 700 units. There is also more on the way, with more than $3 billion in current development including all real estate sectors—additional multifamily, condominium, and office and retail development. Absorption will temporarily trail inventory, but with Chesterfield being one of the most affluent submarkets in St. Louis, it should stabilize quickly.

What surprised you most about St. Louis in the past 12 months?

Bobby Mills, Director, Berkadia. Image courtesy of Berkadia

Mills: What surprised me most about the St. Louis multifamily market over the past 12 months is its resilience to the COVID-19 pandemic. Initially, many believed property performance would suffer with regards to collections and occupancy, and transaction volume would decrease. However, our team experienced the opposite. We have remained extremely active throughout the pandemic, both from a sales and financing perspective.

Kendrick: This can partially be attributed to historically low interest rates. Overall, Berkadia ended 2020 with a combined mortgage banking, investment sales and joint venture equity placement volume that exceeded $35 billion, underpinned by $27 billion in loan production, which was consistent with 2019’s performance.

What are some of the positive trends you’ve seen in the metro’s multifamily sector in the past few months?

Mills: Multifamily valuations are as strong as we have ever seen them. Rent growth continues and interest rates remain historically low which, in turn, causes valuations to increase. So far this year, our team has closed two large deals at sub-5 percent cap rates. Other deals we have transacted this year have also closed at record-high prices. This certainly is not something we would have predicted a few years ago, let alone during a pandemic.

READ ALSO: Top 5 Markets for Occupancy Growth

How has the pandemic shaped investor interest? What type of properties are popular investment options now?

Mills: The pandemic has certainly caused increased investor interest in both the multifamily and industrial property sectors. Both property types are considered less risky at this time—compared to office and retail—and have demonstrated impressive resilience in the face of unknown, catastrophic events such as a pandemic.

Regarding multifamily, Class B assets with a value-add component continue to attract the most interest. In St. Louis, there is a large stock of the 1970s and 1980s vintage apartment complexes that are unrenovated, which allow for an investor to make interior and exterior improvements and increase rents accordingly.

Kendrick: The pandemic has shaped investor interest by shining a light on stabilized Midwest markets experiencing steady rent growth and returns, while properties in high-density, urban locations have struggled. We continue to see strong demand from investors for all types of multifamily, including both core properties and value-add opportunities in St. Louis. Several of our recent closings brought new investors from both the East and West coasts to the St. Louis market with record-low cap rates.

Do you expect more or less activity in the metro this year in terms of sales and acquisitions?

Mills: We expect more activity this year. Sellers will continue to be motivated by record-high valuations. Buyers will be motivated by historically low interest rates.

What are your predictions for St. Louis’ multifamily market?

Mills: We foresee the St. Louis multifamily market remaining very strong throughout 2021 and into 2022. St. Louis has increasingly attracted the interest of coastal buyers who are searching for higher yields. While cap rates have compressed in St. Louis, they remain very attractive compared to the major markets, such as New York or Los Angeles. Development activity will also be strong, with absorption being close to its historical norm of roughly 95 percent.

Kendrick: The pandemic precipitated unprecedented technology adoption in the CRE market—from virtual tours to remote closings, to better tools to derive insight from available property, geography and trends data. We’ve seen an incredible change that has not only increased the efficiency of the transaction process, but also has provided unique insight that has enabled us and our clients to make better decisions for long-term success. We’re excited to see this continue.

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