St. Louis So Far: 2016

real-estate-market-study

Keeping Pace with Predictions

St. Louis’s real estate market has performed more or less as predicted, and what’s interesting about that is that there were so many predictions for our local market for 2016. The city was mentioned in many articles about 2016’s hottest real estate markets, and it has earned those spots.

St. Louis, like many of the Midwest markets, tend to lag the trends you’ll see on the coasts. Prices and rents on the coasts have been steadily increasing over the past few years. St. Louis, however, hadn’t seen that corresponding sale price increase while rents slowly went up, which made it a prime location for investors. Now the city is seeing those price increases come into specific neighborhoods that are most affected by the city’s improving economy and commercial/business developments.

Midtown Rising

As has been the case for the city for a few years, the stretch of city known as Midtown around Saint Louis University is seeing a lot of development, particularly around and by the university. The university has long been an active and key institutional player in that area, which started a cycle of nearby developments. Ikea opened a store just across from SLU’s campus, which has acted as an anchor for further developments nearby. Most recently that same corridor saw the go-ahead for a $232 million development across the street from Ikea at the former Federal-Mogul foundry. The site will be redeveloped into restaurants, offices and apartments. A bit northwest of downtown St. Louis is also seeing a $1 billion development by the National Geospatial Intelligence Agency as they build a new campus to relocate from south of the city.

Those developments, being centrally located, have brought more people into the nearby residential areas, which has increased demand and prices. In South St. Louis, specifically in the 63109 ZIP, we’ve seen apartments rents increase in a few years from an average of $475 for a 1 bedroom apartment, with the top end being near $600, to an average closer to $575, with the top end pushing $700-$900 for a fully rehabbed 1 bed unit.

The areas directly south of Midtown, in particular the Grove, Shaw Garden, Tower Grove North/South, North Hampton and South Hampton have seen the biggest boosts from those Midtown developments, thanks to their proximity and the dual city features of the Botanical Gardens and Tower Grove Park. Those areas have also had a lot of time to mature as the work we’ve seen in that corridor has been going on for a number of years.

New Players, Familiar Strategies

Another interesting trend has been the increase of younger people taking advantage of house hacking, one of our favorite strategies to begin real estate investing. There are many more young people who are taking the opportunity to find multi-family properties to live in and renovate. The obvious effects of that are two-fold: increased scarcity of properties in the hottest neighborhoods, and a continued upward trend of rent increases as investors, both new and seasoned, incorporate higher-end finishes to their rehabs and accordingly bump rents.

Back in our example ZIP, 63109, that increased market pressure has meant that we’ve seen properties that are not cash flowing at current rents getting sold for above asking price. That’s a clear sign that the buyers are counting on doing either light rehab and putting in a moderate rent bump to ride the tide, or they’re hoping to forerun those market rent shifts by doing a heavier rehab and putting their vacancies on market near or at the top end of the spectrum.

Those more aggressive strategies have been rarer in St. Louis in the past. St. Louis has been a bread-and-butter cash flow city for a long time. When a market heats up, as we see on the coasts, the rental profit margins can start to thin and people start speculating on increasing sale prices for the property. We aren’t seeing all-out speculation in the areas we’re watching, but it seems like buyers are willing to get properties for future (delayed) cash flow, which is an interesting change.

Pick Your Play

Perhaps the most exciting thing about how the market has changed in the last year has simply been that, almost no matter the strategy you choose, you’ll won’t have to fight the market to see if it works. The aggressive play has been tried and proven, and you can still easily find deals here that cash flow on day one without having to budget top-end rehabs. With our sale prices staying at attractive entry points and the entire market pushing rents the buy-and-hold investor can pick almost any strategy they wish in one single market without the price premium you’ll find in most other markets.

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Peter MacKercher

Peter Mackercher is the principal and investment property specialist at Mogul Realty. With over a decade of experience in real estate in St. Louis, he brings tested strategies and knowledge to every project he works on.