MARKET SNAPSHOT: St. Louis’ Barriers to Entry Prove Positive for Existing Operators; Private Equity Becomes More Aggressive

St. Louis—The apartment sector is the shining star of all real estate disciplines in St. Louis, though the economy of the city is just “okay,” says Kenneth P. Aston, Jr., partner, Hendricks & Partners.

“We have a really broad and diverse economic base here,” Aston adds, pointing to employers such as Barnes-Jewish Hospital, Enterprise Rent-A-Car and Anheuser-Busch InBev. Additionally, the United States Department of Agriculture, Procter & Gamble, Unisys and Liberty Mutual Group recently announced plans to relocate some operations into the area, according to Hendricks & Partners’ 2011 St. Louis Forecast. Meanwhile, Boeing and Express Scripts plan to expand operations.

The latest unemployment rate was 9.9 percent (February 2011), down from the peak of 11.0 percent in March 2010, according to the U.S. Bureau of Labor Statistics.

“The biggest problem with growing our region,” Aston tells MHN, “is that we have too many political entities or subdivisions that compete with each other for the same business. The city of St. Louis is its own political entity; then you have St. Louis County, which is a totally separate entity with its own county executive. If you have [a business] that wants to relocate, you have the city offering incentives to get that employer there, and then the county offering incentives. Then within St. Louis County you have 96 municipalities all with their own elected mayor and they are all fighting the same battle.

“There has never been a unified effort in St. Louis to secure some of these people, and there never will be an effort until the city of St. Louis and the county of St. Louis agree to merge together,” Aston adds.

That, however, has contributed to a lack of new supply, a good sign for existing operators. “There is not a lot of new development because when you have all of the local governments that we have … all these entities have their own rules and their own zoning regulations,” says Aston. “And generally speaking, most of these municipalities don’t want apartments; they would rather have single-family homes, and ground prices are such that a single-family home builder can almost afford to pay the same amount of money that an apartment building can.”

With concessions burning off, apartment owners and operators are seeing increases in both asking and effective rents, as well as decreasing vacancies. The market’s average vacancy rate fell to 8 percent in 2010, down 120 bps from fourth quarter of 2009, according to Hendricks & Partners’ report.

The report also projects vacancies to further recede, with the market’s average vacancy falling to at least 7.4 percent this year, reaching just under 7 percent in 2012. At the same time, the firm’s report expects rental growth of about 1.4 percent annually over the next two years.

“Most owners are conservative in St. Louis; if you were to go back 20 years, we get anywhere from 2.5-3.5 rent growth on average per year. It’s pretty steady, and that’s a reason why investors like to invest in St. Louis because we tend to balance their portfolio,” notes Aston. “People need some risk-free investments to balance their portfolio.”

Meanwhile, the most aggressive buyers are private equity, though Aston notes that ownership in St. Louis spans the entire buyer spectrum. Stable conventional apartment communities are trading between 5.75 percent and 7 percent cap rates.

For the future, local governmental leaders continue to push for St. Louis County to be declared a foreign trade zone and partner with China, which would certainly strengthen the region’s commercial cargo hub.