Yes, St. Louis has faced its own challenges during this time of higher interest rates and economic challenges. But the city’s commercial real estate sector has remained resilient, too.
What’s behind this resiliency? A diverse economy helps, as does St. Louis’ location in the center of the country. A strong labor force and a pro-business government have long provided a boost to commercial real estate activity here.
And while these remain challenging economic times, St. Louis’ commercial real estate market is showing signs of increased leasing and sales activity.
We spoke with two commercial real estate professionals working this market about the retail and multifamily sectors in St. Louis. Here is some of what they had to say.
John Morrissey
Principal
Broadmoor Group, St. Louis
Leasing demand still strong in St. Louis-area multifamily market: Demand for multifamily units in our market is still strong. Absorption has slowed a bit, though. In my opinion, this is entirely supply related. The demographic that wants to rent is growing in St. Louis. But the amount of supply that has been delivered in the past two years has impacted our market. There is so much new supply that the absorption of units has gotten a little softer over the past six months, more than it has been for most of this real estate cycle since we came out of the Great Recession.
The amount of new apartment units that has been delivered in the city of St. Louis is higher than what we historically have seen. In St. Louis County, it’s different. That is a mature market. It is challenging to find a developable site in the county. A lot of multifamily projects in St. Louis County are doing well. They are not dealing with the same supply surge that the city has faced.
More choices: The consumer has more choice today when it comes to finding an apartment unit. We are seeing a lot of renters touring four months before their existing leases are expiring so that they can get an idea of not only what community they want to live in but what submarket. Some might be moving from the city to the county. Others might be moving in the opposite direction.
On the other end, we have people who are looking and leasing quickly. Maybe they did a lot of their diligence online. They already know what they want. They come in, look at the property and sign a lease that day. A lot of the concessions being offered today are look-and-lease specials. Consumers are jumping on that. Some owner/operators might say that consumers need to decide in 24 or 48 hours if they want the concession. It’s a way to drive consumers to make a decision.
What renters want: When renters are looking at a new apartment building, they want in-unit laundry. That is one thing everyone wants. And they want full-size washer and dryers. It’s harder to put that 24-inch-wide 2-in-1 washer/dryer in a unit to save space. Renters don’t want that. The consumers want full-size units. That is what we provide in all our projects now.
In the kitchens, they want stone countertops. They want nice cabinets with soft-close doors.
We are seeing more creativity when it comes to community amenities. There is a demand for speakeasies. It’s not enough to have the bar. Residents like hidden speakeasies that they can use or book. Another community put in a putting green in one of their courtyards. The pools are seemingly getting nicer and more creative. Spas are also coming back. Developers are returning to them to sell the sizzle during the lease-up period. Golf sims are popular. There are a lot of grab-and-go or mini-markets, especially in properties that are not mixed-use. It gives the residents the ability to walk to the first floor and grab a drink and relax. That’s a big plus for residents.
The affordable-housing challenge: Every part of the country needs more affordable housing, and that includes St. Louis. Our definition of affordable, though, is different than the rest of the country’s. A lot of the multifamily housing in the St. Louis market is considered naturally occurring affordable housing by Fannie Mae and Freddie Mac.
We did a value-add acquisition in Eureka in southwest St. Louis County. We renovated the units to a Class-A finish and raised the rents to market value. That property is still considered affordable by the agencies. That type of housing is not in abundance in the St. Louis market but it is available.
It’s true, though, that we certainly need more affordable housing. It is a very challenging product to get to pencil right now. I’m alluding to the scarcity of land in St. Louis County. Land is typically too expensive to make affordable housing work. If you can put affordable housing on a lot, then market-rate housing probably works there, too. The market-rate developers are willing to pay more for the land.
You generally need some form of tax abatement. Along with a development partner, we are building 187 apartment units in the city. It was hard to get that deal to pencil even with a tax abatement. Absent that, the deal wouldn’t have worked. We are dealing with high interest rates still. Construction costs have seemed to stabilize, but they are still high and they certainly haven’t gone down. That makes it difficult to build affordable housing without government incentives.
The potential impact of lower interest rates: The Fed’s rate cut should help boost activity in the multifamily market. Some of the construction projects that have been on the sidelines might finally get going. One of our main lenders is prime-based with how it prices. Every time the Fed cuts its rate, that is less interest that we must pay. We need a few more rate cuts to really get things going. That will help new construction get off the sidelines. It will help with investment sales, too.
Any cut will be positive as long as it isn’t the result of a recession.
Working through high construction costs: The higher construction costs make developing new multifamily products very challenging. I wouldn’t say there is one silver bullet to work around those costs. You just must be creative throughout the process. You need to make sure that your business plan is sound and figure out ways to get creative on revenue.
Kate Grewe Milford
Vice president of brokerage
Pace Properties, St. Louis
A resilient retail market: The St. Louis retail market has been resilient, not just from the perspective of rental rates, but also from the standpoint of vacancy rates. Vacancies remain low in our shopping centers that are anchored by Class-A properties. It is competitive for tenants looking for space in those centers.
Space is being absorbed in Class-B centers, too, but they are often being filled by alternative users. You have pickleball centers and entertainment concepts filling those spaces. We’ve seen self-storage concepts absorbing those bigger Class-B boxes. There is still demand for Class-B space. That’s been a positive for the St. Louis retail market.
The challenges of high construction costs: While there is a strong level of leasing activity, the low vacancy rates are being kept low, too by high construction costs. Those costs continue to be a hurdle preventing a lot of new retail development. There is little new inventory in our market, which is also helping to keep vacancy rates low. That discrepancy between what retailers can pay and what it costs to build remains a paint point.
We aren’t seeing the same type of escalation in construction costs today. There is more consistency. But the costs remain high. That is still a primary concern for developers here, unfortunately.
Some retailers are doing better than others: Grocery-anchored retail continues to do well in our market. Many of our strongest centers are anchored by grocery stores. Really, any developments anchored by a large retailer, such as Walmart or Target, is where we see the strongest performances.
Experiential retail remains popular, too. We see people getting creative with the less-desirable boxes or oversized spaces, considering those alternative uses. There is still a desire for that kind of user.
We also see a lot of activity from fitness users. Crunch Fitness is entering our market, absorbing a 40,000-square-foot Buy Box at the Manchester Highlands development in Manchester. Crunch Fitness has multiple other leases that are in the queue. Planet Fitness is active in our market, too. It absorbed a former Best Buy location in Brentwood.
Fast-food players are still active in our market. We are seeing growth from chains such as Chick-fil-A, Chipotle and First Watch. Grocery users are active. Meijer is opening its first store in our market in the Orchard Town Center development in Glen Carbon, Illinois, which will be followed by another new store in O’Fallon, Illinois. These are exciting additions to our area.
Urban retail: Target already has many locations in the St. Louis market, but this summer it opened its first urban store in our market. That’s a smaller version of a Target that caters to urban shoppers. That’s a fun new addition from a retailer that we have known and loved. Interestingly, Target is also introducing its largest store in our area at the Market at Olive development in University City. Target is co-anchoring that development along with Costco. Target just closed on that site in August.
I think we will continue to see retailers experiment with different store sizes. It’s the right-sizing of retailers. Look at Burlington. They are looking at some of their existing stores in our market and right-sizing them. In Fairview Heights, they are re-tenanting a Bed Bath & Beyond box of more than 45,000 square feet. Burlington is taking a portion of that while the other half is being absorbed by Golf Galaxy. Burlington is reevaluating many of their stores here.
This strategy is top of mind for property owners who are dealing with higher vacancies. They can get more juice out of their properties by right-sizing them and dividing them up for more than one tenant.
The omnichannel approach: The omnichannel approach remains a common one for retailers today. They are focusing on both their online sites and their physical storefronts. Customers can order online and pick up in a physical store. They can order online and then return what they buy to any store in that chain. Retailers are enjoying ushering people into their stores. That way, they can capture additional, last-minute sales. Whatever can get bodies into stores, they are doing it.
The fast-casual restaurants are a good example of how innovative retailers are becoming. Panera Bread opened a new prototype here. You order your food in an app. You then pick it up in a drive-through lane. There’s not even a drive-through window that you can use to order from your car. It’s like the Chipotlane concept from Chipotle.
So, yes, omnichannel is a focus. But retailers still want to get the bodies in physical stores. People are all about convenience, doing things efficiently. That will remain at the forefront. Whatever retailers can do to boost the convenience of their customers, they’ll focus on taking those steps.
The positive impact of lower interest rates: Lower interest rates will absolutely have a positive impact on retail development and investment sales. As we see borrowing become less expensive, there should be an uptick in the investment market. If there are future interest rate cuts, that will provide an even bigger boost. The easing of interest rates will loosen things a bit on the investment side.
