Industrial might rank as the star asset class during the COVID-19 pandemic, but multifamily isn’t far behind. Apartment markets throughout the Midwest have remained strong during COVID and show no signs of hitting a slump anytime soon.
The St. Louis market is no exception. Investors are still putting their dollars into multifamily properties in St. Louis and its suburbs. Renters are still paying their monthly rents on time. And vacancy rates remain low.
What’s behind the strength of St. Louis’ multifamily market? Midwest Real Estate News spoke to Christopher Will, vice president and commercial loan officer with the Clayton, Missouri, office of Gershman Mortgage, and Kevin Kozminske, senior managing director with the St. Louis office of Berkadia, to get their thoughts on the strength of the St. Louis apartment market and the demand for multifamily financing.
Here is some of what they had to say.
How strong has the St. Louis multifamily market been throughout the pandemic and during 2021?
Christopher Will: We are seeing a strong market today. With regards to FHA financing, we have seen all-time record highs. A lot of activity is taking place now in and around St. Louis. New apartment units are being brought online. We have seen a number of new assets come to market since the pandemic has begun. We have seen a number of multifamily deals that have closed.
There was some uncertainty at the beginning of the pandemic. That led to delays and slowdowns when it came to multifamily deals. We didn’t know what the labor situation was going to be like. We didn’t know how bad the effect would be on the supply chain. Because of that, it was a little tougher to get multifamily deals done upfront. That uncertainty, though, would become a known quantity as the pandemic progressed. We saw exactly what the impact would be and could forecast for it. We could be prepared for it. And throughout the pandemic, we’ve seen that the demand for multifamily assets has remained high.
Kevin Kozminske: Last year was a record year for us on the financing side. We have seen that continue in 2021, both on the investment sales and mortgage banking side. Buyer interest in St. Louis remains strong. There is still a lot of redevelopment happening and a lot of new construction of multifamily properties. The velocity of new projects remains strong even coming out of COVID. The big challenge is finding plots of land to build on. That is one of the bigger barriers to seeing even more new multifamily projects in our market.
Has there been any impact from the pandemic that has surprised you when it comes to multifamily financing and deals?
Will: Obviously, more people are working from home. That resulted in a slowdown at HUD because so many of their people were working from home and figuring out how to do it efficiently. That was an initial problem. The learning curve of HUD staff figuring out how to work from home did create some slowdowns when it came to closing multifamily financing deals.
Another challenge has been the record-low interest rates we’ve seen. They have caused a tremendous increase in the volume of loan requests at HUD. All of those loan requests have led to significant delays in the underwriting and processing of these loans. We are still getting deals done, but they are taking longer on a per-deal basis.
How strong have rents been in the St. Louis apartment market?
Will: Rents have stayed strong. In fact, we have seen some good upward rent trajectory. And certain projects have outperformed their rental assumptions. Many projects have leased up very quickly, quicker than could have been expected.
How strong has demand been for commercial financing for multifamily deals in suburban St. Louis?
Will: There is no question that people have been renting in the suburbs. People are definitely interested in the suburban areas.
Wentzville is one of those suburbs that is doing well. It’s been a hot ticket for renters. St. Charles County has been at the forefront of new multifamily development for the last several years. People are just getting more comfortable with moving further away from the city.
Typically, we’d see new multifamily development occurring around strong employment centers. But that is changing. Out toward Wentzville, there are not a lot of major employers. But there is a lot of new housing being developed and leasing up. Some of this is related to work-from-home. When you are working from home, you don’t have to live right down the street from your job.
At the same time, suburban areas are developing new amenities. They are adding recreational and retail centers. St. Louis is a pretty land-locked area. It is difficult to find large sites to develop. When we got our first Topgolf, it wasn’t built smack dab in the middle of the city. It was built in the suburbs. The suburbs had the ground for development.
Kozminske: We are starting to see a strong growth in demand in the outer-ring suburbs of St. Louis, in St. Charles County and Lincoln County. Finding those large tracts of developable land is difficult in St. Louis itself. There have been some infill redevelopment sites in the last three to six months in the city itself, but we are seeing a lot of multifamily development in the outer suburbs. We have about 800 units under construction or planned in Chesterfield, Missouri, where we haven’t seen much new construction in the multifamily market in the last 35 years.
A lot of these projects were in the planning stages before COVID hit. I think the rising demand is a result of the natural migration into the suburbs overall in the St. Louis market. It’s just a continuation of the expansion of the St. Louis market into the suburbs and even further out at this point.
What kind of infill multifamily development are you seeing in the urban centers of the St. Louis market?
Kozminske: We are not seeing a lot of older office buildings being converted into apartments. What we are seeing are some larger, aging retail sites that are being knocked down and turned into multifamily. There are still a few sites, too, in the central corridor and the Central West End that developers have been able to start putting additional apartment units into.
In downtown, the Ballpark Village project has been highly successful. There are plans for two additional towers of multifamily housing to be built there because of that project’s success. The National Geospatial-Intelligence Agency that is opening in North St. Louis in 2025 is a major project, too. We think we’ll see more multifamily units added around that project, too.
How big of a need is there for more affordable multifamily housing in St. Louis?
Will: There is definitely a need for more affordable multifamily housing. I would also say that in some ways, the pandemic has exacerbated this. The delays with HUD financing have slowed approvals for multifamily deals, too. HUD makes special considerations for deals that are affordable. The time delay to close on those deals has increased.
If we want to see more affordable housing, we will have to see a continued emphasis on financial incentives from governments. The tax credit programs and incentives are necessary to offset the reduction in rental income.
What makes the St. Louis market so attractive to those looking to build or invest in multifamily projects?
Kozminske: It’s the consistency of this market. Investors don’t see the wide fluctuations here that they see in markets on the east or west coasts. We have a tremendous amount of interest now from out-of-town investors. People are looking for nice, stable returns. They are being priced out of other locations where cap rates compressed to the point of no return. They are now looking for a market where they’ll get a little more yield.
When your company is considering multifamily financing requests, what factors do you look at?
Will: If we bringing a new development to market, we look at the factors that HUD would consider. HUD is looking for deals with minimal environmental risk and deals that are in a market that has adequate demand and not enough supply. We also like deals that have an experienced development team behind them. Experience in the market is a positive. We like to work with teams that have already built something like the project that they are proposing.
Kozminske: On the development side, we want to see a location that is desirable. We want to work with clients that have had experience with the type and scope of project they are proposing. The team must have the experience to execute the business plan. We are seeing rising construction costs throughout the industry. There are rising materials costs and labor shortages. We want to make sure we are working with clients who have the expertise to navigate through these challenges.
When it comes to requests for acquisitions and refinancings, we’ll look at the historical operations of the project. We want to make sure that buyers’ expectations and assumptions make sense and that they have an achievable business plan.