Several factors have contributed to the softness in the St. Louis apartment market and are expected to continue to present operational challenges in the near term. A spike in construction has been met with the weak demand caused by the slumping labor market. In fact, demand for rental housing contracted 2.2 percent year over year in the third quarter — the largest decline in more than 20 years — and will likely fall until payrolls begin to expand. As a result, owners have increased concessions to roughly 26 days of free rent. With vacancy on track to rise further this year, concessions will remain elevated, particularly in the Maryland Heights/Northwest County submarket. Area operators are currently offering renters nearly 40 days of free rent, the most of any submarket in the metro area. Nonetheless, many residents are opting to relocate out of the area and into St. Charles to capture lower rents or into Clayton to be near the metro’s healthiest employment corridors. As such, owners in the Clayton/Mid-County submarket have kept concessions relatively flat during the past 12 months.
Turning to investment sales, transaction velocity has slowed in the St. Louis market due primarily to reduced pricing and increased buyer caution regarding weakened fundamentals. Additionally, activity from out-of-state investors has dropped off considerably; there have been no sales involving out-of-state buyers during the past 6 months. The handful of local buyers who remain active in the metro area are targeting smaller assets with relatively healthy occupancy rates, as these properties are generally best-positioned for revenue growth once the local economy gains traction. Recent deal flow has been concentrated east of Interstate 44 and in the St. Louis City South submarkets, especially near Interstates 64 and 44. Asking rents in these areas are among the metro’s lowest, attracting residents seeking to control costs. Furthermore, initial yields in these submarkets are approximately 25 basis points higher than the metro average, making financing somewhat easier to obtain.
By the Numbers
Employment: Following the elimination of 18,700 positions last year, employers are expected to cut 43,000 jobs in 2009, an annual decline of 3.2 percent.
Construction: Developers are projected to complete 795 units in St. Louis this year, a 0.7 percent increase in inventory. In 2008, just 230 units were delivered.
Vacancy: Renter demand is expected to remain weak through the coming quarters due to job losses and an increase in the number of alternative housing options. As such, vacancy is forecast to end the year at 9.6 percent, 180 basis points higher than last year.
Rents: Owners will continue to curtail asking rents and expand incentives to counteract waning demand. Asking rents are expected to finish the year at $720 per month and effective rents will be $687 per month, decreases of 1.3 percent and 2.7 percent, respectively.
— Stephen Maulden is the regional manager of the St. Louis office of Marcus & Millichap.