This article first appeared in the St. Louis Beacon: June 2, 2008 - To get people to move into lofts and condominiums in the heart of the city, which has experienced a residential resurgence in the last decade, property developers in downtown St. Louis are switching strategy. In these tight economic times, developers are moving away from sales and turning to rentals to attract new residents.
One of the biggest examples of this trend toward rentals is the Park Pacific building being redeveloped by the Lawrence Group. Instead of a $140 million project with 140 for-sale condos, the developer is now planning a $120 million project with 193 apartments.
"For the moment, we're better off providing rental property," says Steve Smith, president and chief executive of the Lawrence Group. "It gives people an opportunity to experience downtown living without having to make a commitment with the purchase of a residential property. They get try out the lifestyle as a renter first."
The average size for the Park Pacific rental units will be 1,150 square feet, compared to the condos, which ranged from 850 square feet to 3,800 square feet in the first design. Rents will be from $700 to $1,400; six penthouses will rent for $2,000 and up. Condos in the first design were priced between $175,000 and $750,000. "We believe the Park Pacific will be of the highest quality for apartments and services in downtown rental property," Smith says.
Despite the switch to rentals in the group's latest project, Smith says condos are still selling at its Marquette building, with 80 condos and 40 apartments. "Sales have been good in the last six months," he says. All but four of the available condos have sold.
"Downtown is a very vibrant and exciting place to be," he says, adding there is less space available downtown than in other areas and people want to live in an urban environment.
McGowan Brothers Development, a redeveloper of historic buildings, is a bit ahead of the curve when it comes to supplying the downtown market with rental units. A majority of the development by the firm has been rental projects, says Sean McGowan, a partner.
"The few (for sale) condo projects we have been involved with were sold out for the most part prior to the recent mortgage problems," McGowan says. "Many people are afraid to buy right now and are, therefore, choosing to rent instead. It has actually helped our business."
The occupancy rates have increased in the apartment buildings developed by McGowan Brothers. The Fashion Square Lofts, for example, has 89 rental units with only two vacancies. The Terrace Lofts, with 48 rental units, has only two vacancies. The other four properties that McGowan Brothers developed also only have two or three vacancies each in downtown.
"I think people will continue to move downtown at increased rates," McGowan says.
Occupancy for residential units in downtown St. Louis is 89 percent for developments opened at least one year, according to the Downtown St. Louis Partnership. The nonprofit group estimates that about 10,000 people now live downtown, with 4,000 moving in since 2000.
The number of condos sold hit a record of 400 in 2007. "However, the level of activity slowed during the latter part of the year," says Jim Cloar, president and chief executive of Downtown St. Louis Partnership. There is a total of 7,686 residential units in downtown, including 5,586 rentals and 2,100 for-sale units. Another 300 are expected to open this year.
Since the turn of the millennium, 4,000 units have opened in downtown St. Louis. These were at a rate of 240 units a year through 2005, plus 2,500 units coming on the market in 2006 and 2007.
"There is something like an 18-month to two-year supply," Cloar says, adding that while demand is healthy, robust building may mean it takes longer to sell all the available units.
Sales of newly constructed single-family homes across the country in April dropped 42 percent, year-over-year, according to the latest figures from the U.S Department of Commerce. To make matters worse, prices also dropped. The S&P Case-Shiller home price indexes show prices fell 14 percent in the first quarter of this year, compared to the same period last year.
These numbers are not necessarily representative of the market for downtown residential development, however. While the national numbers are for single-family homes, development downtown consists of mixed-use buildings, which also contain offices and retail space.
"The nice thing about the city is the different things you can do with a particular piece of property," says Barbara Geisman, executive director for development of the city of St. Louis. "It is just not one thing like if you had a 100 single-family lots in the suburbs."
Geisman says it is important to tailor developments downtown to what sells and what banks are willing to finance. "We are seeing developers switching from condominiums to rentals, and in some cases they are switching from residential to office and retail," Geisman says.
"We continue to be very optimist about downtown's future. Everything that we are seeing, even in the face of a credit crunch and the single-family market situation nationwide, people are still very interested in downtown projects and are finding ways to do them."
Geisman say that many of the people who would consider renting downtown instead of buying may be in their 20s or 30s with little, if any, equity built up in their current homes.
"We need a mix of for-sale condos as well as rental housing," she says.
Developers need the ability and the willingness to adapt to market conditions to stay in business during market turmoil, says Bob Lewis, principal at Development Strategies Inc., a consulting firm based in St. Louis that provides economic and market research nationally.
The trend toward developing rentals instead of for-sale condos in downtown St. Louis might only be temporary, Lewis says. When home prices stop falling and banks are once again more willing to lend, many downtown apartments could be converted into condos.
"The good companies that are developing in downtown will use this period to plan ahead and secure new properties," Lewis says. He says that might include property currently used as parking lots or other structures that are underused.
Brian R. Hook, a freelance journalist in St. Louis, has reported for the Financial Times, MarketWatch.com, and U.S. News & World Report.