MARKET SNAPSHOT: Slow but Steady Wins in the Gateway City

By Erika Schnitzer, Associate EditorSt. Louis—Similar to other midwestern markets, St. Louis has experienced immense job loss and forced early retirement, which has resulted in a softening of the apartment market, according to Ken Aston, Jr., partner in Hendricks & Partners’ St. Louis office.According to the most recent Bureau of Labor Statistics report, St. Louis’ unemployment rate, as of February 2009, sat at 9.2 percent. Last year’s InBev acquisition of Anheuser-Busch and the closing of Fenton’s Chrysler plant resulted in major employment losses throughout the MSA. Despite this, however, the metro’s relatively slow growth means that it never experienced a tremendous amount of overbuilding—certainly a bright spot in today’s market.While Marcus & Millichap’s 2009 National Apartments Report forecasts that the metro’s vacancy will gain 120 basis points from last year’s level, Hendricks & Partners’ Aston notes that the occupancy remains steady in the low 90s.Those projects that are seeing occupancy levels in the 80s, says Aston, are mostly those that were “purchased within the last few years and were financed with a higher-than-normal leverage, and the owners are struggling to keep up with the capital that’s required to keep their properties competitive.” He adds, “For the most part, those who are suffering more than anyone are C and B- properties that were purchased within the last several years.” While the shadow market has not had as big of an impact as it has had on other markets, particularly in Fla. and Calif., Aston tells MHN that there are many conversions in the downtown CBD taking place.However, he notes that there is almost no new construction, and according to Marcus & Millichap, only approximately 400 units are slated for delivery this year, expanding the metro stock 0.3 percent. Aston does point to the Roberts Brothers’ Roberts Tower (pictured) as an example of an innovative project for the metro, however. He notes that the 55-unit tower, designed for LEED (Leadership in Energy and Environmental Design) Gold certification, is the first new high-rise condominium in the CBD. Despite its high-end nature, Aston says, “there is nothing that will stop them.”Elsewhere—most notably in terms of transaction velocity—the market has slowed considerably. “There haven’t been any institutional purchases in the city this year. And quite frankly, a lot of money is sitting on the sidelines waiting, because the thinking is that there is going to be a great opportunity for a better buy later on this year,” Aston says.“The deals that investors typically like to look for are value-adds and in this market and economy, they are harder to finance, which is contributing to the slowdown in sales.”Cap rates are currently in the low- to mid- 7 percent range and are expected to rise this year, according to Marcus & Millichap.The bright spot, Aston notes, is the market’s stability. “We are starting to see investors looking to balance their portfolios and invest in a market that has a fairly predictable return,” as compared to other markets, particularly those in the Southeast and Southwest. While the trade-off will be slower growth, Aston believes that the market’s stability will provide decent investment opportunities here.(Click here to read last week’s Market Snapshot on Denver.)