Higher interest rates have slowed multifamily sales throughout the St. Louis region. That doesn’t mean, though, that the demand from tenants for apartment space throughout this market has slowed, too. It’s the opposite: Demand for apartment units in the St. Louis market hasn’t lagged even with the economic challenges facing the country.
Andrea Kendrick, managing director of investment sales at the St. Louis office of Berkadia, says that the fundamentals of the local multifamily market remain strong. Higher interest rates haven’t changed that.
We recently spoke with Kendrick, who has closed on more than $1 billion in sales volume during her commercial real estate career, about the resiliency of the St. Louis multifamily market. Here is some of what she had to say.
Andrea Kendrick, managing director of investment sales, Berkadia
Can we start by talking a bit about higher interest rates? How have they impacted multifamily sales in the St. Louis market?
Andrea Kendrick: The higher rates have certainly impacted multifamily transactions. In recent months, there has been a lack of pricing discovery because the overall transaction volume is roughly 65% to 70% lower than it was last year. St. Louis is no different than the rest of the nation when it comes to this. There seems to be a lot of capital waiting on the sidelines.
Buyers are beginning to look for more of the distressed deals. They want the value to reflect a certain level of distress. We haven’t seen too many sellers who have been willing to meet the market. That leads to a pretty big decline in transaction volume.
What about leasing activity? That has remained strong in the multifamily sector despite higher rates, right?
Kendrick: Multifamily fundamentals in general have been healthy. Occupancy levels are in the 94% to 95% range throughout the market. Everyone needs a place to live. Post pandemic, we have seen people renting for longer periods of time.
It’s very expensive to buy a home today. That will continue to have a positive impact on multifamily leasing activity. Homeowners are not moving because they want to keep their lower interest rates. That is benefiting multifamily occupancy rates: There aren’t as many homes available for people to buy, so they are renting longer. I checked with our research department, and they are estimating that demand for apartments in the St. Louis market will reach its highest level since 2021.
What impact have higher rates had on the new development of apartment projects in your market?
Kendrick: In this post-pandemic cycle, renter demand has accelerated throughout the St. Louis MSA. That has led to an influx of new construction. Historically, we have seen about 2,000 new apartment units per year added to the market. Currently, there are close to 4,000 multifamily units under construction, almost double the historic average.
But high interest rates, high construction costs and moderating rent growth is leading to slower development now. That should continue during the next couple of years.
Resident retention is critical today. Operators are facing added pressure to keep their tenants renting for a longer time.
What helps landlords retain their tenants?
Kendrick: The amenities they offer are key. I think of amenities in different tiers. The top tier includes affordability and security. Also in that top tier, I’d place proximity to employment, especially for tenants who are not working remotely.
The next tier is about technology and connectivity, not just in units but throughout the common areas. Some of the developers are adding small workplaces to their common areas. That’s attractive to tenants who want to be able to work from anywhere these days. Even outdoors by the pool, connectivity is important.
Then there are some other important amenities, like in-unit washers and dryers and convenient parking. These amenities can help landlords keep their tenants for a longer time.
Are you seeing any new trends when it comes to demand for suburban vs. urban properties? Are there strong markets for both multifamily types?
Kendrick: Post COVID, we have seen people moving into apartments rather than back home with their parents. This trend has supercharged demand for multifamily, especially in the suburbs. You are typically going to find larger units, more green space and more amenities in the suburban multifamily developments.
In the St. Louis MSA there are a handful of submarkets that are seeing especially strong demand for multifamily space. St. Charles County leads the region in deliveries and absorption. That’s interesting because St. Charles County is one of our farthest west suburban submarkets.
But I’d say that the St. Louis city is still a desirable place to live. It offers close proximity to employment. Some of the more popular neighborhoods in and around downtown are seeing a higher amount of new development activity. Those neighborhoods are closer to the employment drivers in our arera, places like Washington University School of Medicine, St. Louis University, the Cortex Innovation Community and the National Geospatial Intelligence Agency.
The suburbs will always be desirable. They offer safe schools and more green space. But there are good pockets of activity in the city, too. Both parts of our market are attractive to renters.
How important is the walkability factor? Do renters want to be able to walk to restaurants, public transportation and entertainment?
Kendrick: Walkability is important for some developments. But St. Louis is a bit more spread out. Many people here rely on their cars to get around. I think if residents are renting in an area like Central West End, they are looking for the walkability factor. There are several restaurants, shops and job opportunities they can walk to there. Overall, in the St. Louis market, though, I think walkability might be less of a factor depending on where renters want to live.
Why do you think the demand for multifamily space on the part of renters has been so strong for so long?
Kendrick: Right now, the demand for multifamily space is very strong. Everyone needs a place to live. It is more expensive to own today than it is to rent. There is a single-family housing shortage. The fundamentals in general are strong.
We think that demand will remain strong in 2024. There are some uncertainties going into next year, but these are more on a global scale, such as the wars in Israel and the Ukraine. There are uncertainties with 2024 being a presidential election year. There is uncertainty about how long interest rates will remain elevated. But as prices start to recalibrate around those higher interest rates, the market will stabilize. Demand will remain strong. Occupancies will remain in that 94% to 95% range.
