Charlie Cafazza, senior vice president and market manager with the St. Louis office of Associated Bank, knows the St. Louis market. And when he looks at all commercial sectors in the region, he sees steady improvement. Cafazza recently spoke with Midwest Real Estate News about the recovery in this important Midwest city.
Midwest Real Estate News: When you look at the St. Louis area, are you seeing more commercial real estate activity across the region today than you were maybe one or two years ago? Cafzza: Definitely. We are seeing more activity across the board in all property sectors. Some are healthier than others. Some are in different points of the recovery cycle. All, though, are showing some positive signs. Two years ago, a year-and-a-half ago, the definition of a positive sign was seeing the distressed properties trade and get into the hands of someone who could move them forward. Now we are seeing more activity that is getting away from distressed to investment-oriented sales. We are seeing more capital being invested into projects. That’s a good sign.
MWREN: What sectors are performing better than others? Cafazza: We are seeing the most activity in multi-family and apartment projects. That sector is the furthest along in its life cycle in terms of real estate investment recovery. Part of that is because of the remaining fallout of the housing bust. People got out of houses and went to rentals. In the days of the housing slump, there was a lot of demand for rental housing in the St. Louis area. We also saw a lot of development activity in this sector, not only a lot of rehab work but new construction, too. As consumers have seen the economy improve and have gotten more confident, as they’ve continued to get their legs under them, we are starting to see retail perk a little. Retail isn’t making great strides, but we are seeing activity in targeted investment infill areas. We are seeing activity in areas that have good demographics. We are still not seeing speculation by the retailers based on predicted future demographics, though. There was a time when the housing boom was in full bloom when we saw companies making speculative decisions to put themselves in the path of population growth, in the path of where those houses were coming. We are not seeing that today. But in areas with good demographics, we are seeing retailers committing to new space. The good demographics, though, have to be there.
MWREN: What about in some of the other main commercial sectors? What kind of activity are you seeing in these sectors? Cafazza: Behind retail and multi-family is office space. That is the third most active sector today. We are not seeing any new speculative construction. But good properties are getting recycled. You can still recycle these properties at below-replacement costs. You can refresh and refinish a property. You can present a nice product at a good price. We are seeing that here, and these properties are generating activity. Industrial is the laggard right now. That’s not really surprising if you look at how a recovery works. As the consumers get more confident, as housing improves, retail gets better, too. And as the housing market improves, which we are seeing now, the office market tends to get healthier, too, because when we have more confident consumers they are spending more. This inspires companies to hire more people. When you get more jobs, you get a stronger office market. Once people are spending more and buying more, the industrial market starts to improve because it is needed to replenish the inventory of products that consumers are buying. That’s how I look at it; that’s the spectrum that I’ve seen. To sum up, we’re seeing a little bit of perk in every sector. Some are further along than are others. I’d put multi-family and retail out in front, with office and industrial in third and fourth.
MWREN: What do developers need to have today to earn financing for their projects? Cafazza: That’s hard to answer. Every deal is different. Most banks are still focused on the equity in the deal, in picking the right place to be as far as loan-to-value. The market, though, is changing. Banks are showing more confidence in pursuing deals today. As the multi-family market hums along, you are seeing strong appraisal values and low cap rates in that sector. The banks are focusing on that market. There are a lot of construction dollars being invested in that sector. But banks are looking at different factors when it comes to multi-family than they are, say, when they are considering industrial deals, the segment that is the most behind in its recovery.