by Dan Rafter
The multifamily sector is soaring across the country and the Midwest. The St. Louis market is no exception, as developers continue to bring new units to the region and existing apartment properties continue to enjoy low vacancy rates.
Midwest Real Estate News recently spoke with Andrea Kendrick, a director with the St. Louis office of Berkadia Commercial Mortgage, and Kevin Kozminske, senior managing director in the same office, about the strength of the apartment market in St. Louis and the reasons behind its strong performance.
Midwest Real Estate News: The apartment market is hot across the country. Is St. Louis any exception?
Andrea Kendrick: No. Overall, the St. Louis-area multifamily market is really strong. Rental demand has increased. The overall occupancy rate is running at about 94 percent to 95 percent. There has also been a slight increase in asking rents, to right around $955 a month. Concessions are down about 20 basis points.
MREN: Why is St. Louis such a strong rental market today?
Kendrick: I think part of the reason is that St. Louis is such an affordable city. That is one of the major attractions here. Rent only accounts for about 25 percent of a person’s income compared to almost 30 percent on a national level. We are also seeing a lot of job growth in certain industries such as education and healthcare services. There has been a lot of job growth here, so people are moving to the city. Many of these people are choosing to rent.
MREN: We often see that downtowns are performing especially well when it comes to multifamily. Is that the case in St. Louis, too?
Kendrick: Yes. Rental demand is highest in the urban core area, downtown. But that is not the only part of the area that is attracting renters. The Central West End area, Clayton, Richmond Heights, Maplewood are all in high demand because of their centralized locations. These areas offer that urban lifestyle, too, which is what residents are looking for. They want a live/work/play area. They want to be able to walk to local attractions. They want everything at their fingertips. The whole goal is to be within walking distance or a train ride away of the restaurants, shops and night life.
MREN: Are you worried at all that there is too much apartment construction today?
Kendrick: Absorption is expected to keep up with deliveries. There might be some concern that the apartment market could be slowed down by the affordability of single family homes in the St. Louis area. The median home price here is under $200,000. That is pretty affordable. But even considering that, it still looks like demand for apartments will outpace the supply of them. So if there is any real concern about overbuilding, it is very minimal. There is not, at this moment, any real concern about overbuilding.
MREN: Where are you seeing most of the new apartment projects?
Kendrick: It’s interesting, but only about one-third of the new apartment projects are locating in the urban areas of St. Louis. We are still seeing new construction in other areas of St. Louis, in more suburban markets. That is part of the reason why the concern of overbuilding is minimal right now. These apartment projects aren’t rising in just one part of the region. New apartments are being built in all the markets here.
MREN: When it comes to new apartments, what amenities are consumers looking for?
Kendrick: They are looking for that spa-like swimming pool and for outdoor entertaining areas. There are some apartment buildings that are including putting greens. Others have nicely equipped clubhouses that residents can use for hanging out or meetings. They can use them for watching movies or having parties. The key today is the larger spaces outside of the units. That’s where you are seeing more of the amenities today.
MREN: When Berkadia is looking at multifamily financing requests, what factors does the company consider when determining which borrowers get money and which ones don’t?
Kevin Kozminske: We are looking at two types of transactions today, new-construction financing and acquisitions and refinances. When it comes to new construction, what we look at is borrower experience and the specifics of their project, their projected rents and operating expenses. We are very concerned with the experience of the borrowers, with them being able to deliver units on time.
MREN: And what about acquisitions and refinances? What does Berkadia consider for these projects?
Kozminske: The product we are doing a tremendous volume with is Fannie Mae and Freddie Mac. Again, we look carefully at borrower experience and the past performance of a project. We also look at the borrower’s business plan, especially if the borrower is looking to do a value-add play, if they want to finance the acquisition and repair of an apartment property. Borrowers want to acquire these older properties and renovate them. They want to push up the rents they can get with these older apartment buildings. We’ll look at their business model and projections, to make sure they are reasonable and achievable.
MREN: How strong is that value-add segment of the apartment sector today? Are you still seeing a lot of investors acquiring old apartment properties to renovate them and then charge higher rents?
Kozminske: That has slowed down a little in the last six months as prices have continued to increase. They are trying to find that property to make this play work. That is getting harder. But there is still room for this type of acquisition, especially in the suburban markets. You can add to the counter tops, appliances and finishes and then increase the rents. There is still room for rent to grow in that space.