HEARTLAND SNAPSHOT, AUGUST 2004

St. Louis Multifamily Market

The four major trends running in the St. Louis metropolitan multifamily sector include the redevelopment of historic properties and the development of infill, suburban and senior living projects, according to Gregory Lee, the senior vice president of asset management for Gundaker Commercial Group (GCG).

Presently, the historic market is seeing redevelopment for both upscale and affordable housing, primarily in downtown St. Louis and the Central West End. For example, Merchandise Mart, developed by HRI, and the Continental Building, developed by Steve Trampe, are two projects meeting the affordable and upscale housing needs of downtown, both of which are currently under lease-up. In addition, Paul Brown Developer is renovating the Paul Brown Building to offer even more options to the affordable housing needs of the city.

Infill projects have also created a stir in the multifamily market. Developers are taking existing properties in St. Louis and recreating the housing market in a well-established area. MLP is developing Kirkwood Station Lofts in an area formerly home to Target. Other opportunities are being created with land that has been vacant for many years.

Suburban, or garden-style, housing continues to grow throughout the St. Louis area as well. Development for upscale and affordable housing thrives in suburban St. Louis and St. Charles County. Several organizations have built their headquarters or Midwest operations in St. Charles County, such as MCI and MasterCard, creating high-needs for a variety of housing. Mills Properties has provided two communities, The Boulders in St. Louis and The Boulders at Katy Trails in St. Charles County.

Senior living is seeing an influx in the area. Independent senior living with upscale, mid-scale and affordable housing options has become prevalent in the area. Developers have taken notice of the need for space for seniors, providing housing solutions either within or in proximity to mixed-use developments and public transportation. First Capitol Group has recently completed River’s Edge, a senior living community with high-end amenities such as an indoor/ outdoor swimming pool, dining and physical fitness.

The Metro East and St. Charles County are seeing new construction growth in both commercial and residential real estate. With more than 100 municipalities in the St. Louis Metropolitan Statistical Area (MSA), growth has traveled eastward to Illinois and westward to St. Charles County.

Suburban growth has been tremendous in every aspect. Spurs of Interstate 55 and Interstate 44 show an influx in new construction, while downtown St. Louis is seeing growth in historic renovation. “The interior of St. Louis County is where the middle market is seeing a surge of renovation,” Lee says. “Developers are seeking established communities with 25- to 30-year-old complexes in need of their first or second renovation. Renovating and repositioning the existing communities is becoming more pronounced as the population grows.”

There are several examples of these new construction growth opportunities throughout the area, two of which represent opposite ends of the broad spectrum of multifamily development: The Boulevard by Pace Properties and Peine Lakes by GCG.

The Boulevard, which includes condominiums, apartments, retail and office space in Clayton, is currently under construction. This neighborhood concept uses boutique shopping, service retail and luxury living to attract residents seeking concierge-type amenities within their complex.

Peine Lakes is a mixed-use development by GCG in a western suburb of St. Louis. More than 100 acres have been divided into single-family lot space, multifamily housing space, senior living space and mixed-use office/retail space to create a self-serving community that will link to surrounding communities and create a secondary metropolitan area. “Economically, this growth has stimulated not only St. Louis but also the surrounding farm communities,” Lee says. “A measurable portion of the population is still commuting into St. Louis, yet the numbers of those living, working and playing in St. Charles County is growing.”

The areas seeing new development in the multifamily market are the Metro East, St. Charles County, the I-55 corridor and the overall infill renovation /refurbishment opportunities. Both the Metro East and St. Charles County have property available for development and costs are reasonable, though they are increasing rapidly.

Development around I-55 has blended many municipalities into a larger St. Louis metropolitan area. The population is seeking the convenience and comforts of this location and developers are providing units wherever they can.

Infill developments provide a popular option for rejuvenating the area. Developers are providing value-added resources to the housing element, particularly in St. Louis. The city has been combining various financial incentives, including tax increment financing, tax credits and property tax abatements to bring developers in to fulfill the growing need for housing. The city has also been successful in meeting its infill needs with attached single-family housing, and both upscale and affordable multifamily housing. Developers are approaching most municipalities with logical, well thought-out proposals and are seeing an openness to new ideas. Mixed-use projects are now offering housing and commercial components while municipalities maintain control of the number of units. “This not only creates a retail tax component that is revenue generating, but also fulfills the desire to increase available housing in the area,” Lee says.

Developers are seeking a wide array of tenants in this market. Much of the historic renovation is aimed at either upscale tenants with higher disposable income or affordable housing tenants with limited income. Due to the cost of land and redevelopment, infill developers are seeking upscale tenants and offering high-class amenities. Independent senior living developers are seeking tenants for all ranges.

“Unfortunately, the sector being most underserved is the median income sector,” Lee says. Recognizing the unmet demands of this income segment, developers are seeking to refurbish existing middle range communities. This has allowed developers to seek aged or deferred maintenance properties within that middle market sector and raise their standards from Class C+/B- property to Class B+ and higher, all while repositioning existing properties within their submarkets. For example, Chicago-based Plato Foufas & Co. entered the St. Louis market by purchasing Pavilion Apartments. The company plans to do a $7.5 million renovation to reposition and add value to an established complex. HRI also is new to the St. Louis market. HRI’s Merchandise Mart is an example of out-of-town equity partnerships — it used a mix of low-income housing tax credits and historic tax credits, both funded by Related Capital/Charter Mac.

Rental rates range from $400 per month to more than $1,800 per month. The lower end of the rental rates are seen predominantly in North County while higher rates are in Clayton and Central West End. Location, quality of product and amenities offered all factor into rental rates.

A majority of the submarkets show 8 percent to 13 percent vacancy. “Vacancy rates have had a steady, but measurable, decrease since 2003 — a trend that will continue with the increase in interest rates,” Lee says. “This increase should lessen the loss of occupants to home ownership.”

Several projects begun within the last few years are now coming to fruition. Square footage banking allows the time needed to place buildings on historic register and determine usage for the space — all while providing municipalities with logical and logistical plans to maintain the charm of their historic centerpieces. GCG purchased the Dillard’s Building in February, but has yet to define the use of the space. To address several issues within the city, GCG may develop apartments or condominiums on the upper stories of the building while creating retail and office space at street level. Activity on the project will probably not be seen until 2006.

“The western portion of St. Charles County is an area to watch in the future,” he says. The availability of land and reasonable development costs will give momentum to commercial and residential development.

Reasonable development costs and an interest in full-service community development will create an interesting growth pattern in the St. Louis Metro East. “There is an undeniable interest to move back to the city; therefore this sector will continue to perform, either via infill or historic renovation,” Lee says.

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