HEARTLAND SNAPSHOT, JUNE 2005

St. Louis Multifamily Market

Relatively low interest rates and a sluggish stock market have generated interest in multifamily real estate in St. Louis. Prices have climbed, pushing cap rates between 6 percent and 8 percent. Lackluster employment numbers accompanied by a hot housing market have contributed to occupancy rates hovering around 91 percent. The highest occupancy recorded is in North St. Louis at 92.6 percent, while the lowest is  downtown at 87.3 percent. These fundamentals have pushed investors to their limit as they search out what seems to be an elusive target: cash flow. Yet, acquisition of multifamily real estate has not slowed down in the state of Missouri.

Recent examples of multifamily transactions include Sun Valley Lakes and Town and Four Apartments. With a selling price of $49 million, Sun Valley Lakes is a 680-unit complex in St. Charles County.  The 502-unit Town and Four Apartments were recently purchased for $32.5 million.

Despite low occupancy, the downtown market continues to expand with vibrant energy. Housing development is exploding in all directions as developers take full advantage of tax credits and other related incentives. Tax credits can provide up to 50 percent of the development costs. During the past 5 years, investors have funneled 2.5 billion dollars into the city. Building officials having a better understanding of the constraints inherent in and flexibility required for the adaptive use of these historic buildings have helped these projects to be more feasible from a financial perspective. Many of these turn-of-the-century buildings have unique structural features such as timber ceilings, exposed brick walls, granite columns and high ceilings. These features make for a very unique living experience as many of the buildings are developed into condos and apartments.

An example of this is the 9-building Cupples Station Buildings in the Warehouse District. Clayco, serving as design-builder, is transforming two buildings into modern apartments. The 175,000-square-foot warehouse will be transformed into 131 loft-style apartments. One of the major features is an atrium that will extend through the center of the building. The estimated cost of this project is $42 million.

Balke Brown Associates and other investors plan to spend $25 million to turn the former Pet Milk building into 118 luxury apartments. Projected completion is September 2006.

In spite of the momentum the market has experienced in multifamily, the Federal Reserves decision to raise the Federal Fund rate could tighten the market. The Federal Reserve made it clear that they will continue to raise the rates at a measured pace. In response, commercial banks will react by increasing the prime lending rate. As interest rates move up, sales of homes could slow down, which in turn, could improve occupancy rates. However, many investors who paid premium prices for their multifamily investment borrowed using a floating rate. As their debt services goes up, it could offset any cash flow. In addition, the cost of running an apartment complex is outpacing rent increases.

This activity could stimulate a correction as owners sell off properties to protect assets. A prime example of this is in the area of luxury apartments. Accelerating development costs are influencing owners to build luxury apartments and demand premium rents. Due to these high construction costs, any increase in vacancy could have a significant negative effect on the bottom line.

Although some short-term correction is expected in the market, multifamily real estate will continue to be a sound investment in St. Louis. Developers continue to turn abandoned historic buildings downtown into sustainable communities. In the county, projected development in both the retail and corporate sector will improve the economic fundamentals. This will fuel improved occupancy rates and real estate values.

— Robert Kahn is a broker and director of operations for Realty Exchange in St. Louis.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.