Aug 23

Rents Rose Fastest in Skinker DeBaliviere

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Great news? According to Zillow’s May 2017 Rental Market Overview, Skinker DeBaliviere has shown the largest increase of any St. Louis neighborhood in annual rents, a 12.9 percent gain. The only other neighborhoods where rents grew by more than 10 percent in the last year were Vandeventer (11.2 percent), and Tiffany (10.3). Notably, the increase in rents in our neighborhood was also higher than any town in the St. Louis Metro area, including towns in St. Charles County and Metro East in Illinois. People clearly want to live here, and we are on a roll. If you own rental properties in the neighborhood, this news might make you feel like breaking out the champagne. It also might give you some second thoughts about selling when you get those unsolicited letters from real estate operators asking to buy your home, as so many of us on my block seem to. If you own property in the neighborhood, then what’s not to like?

{Zillow}

Well, even if you like and will benefit from higher rents, don’t count your chickens. At the current rate of increase, if sustained, rents in our neighborhood would double in only six years, a highly unlikely course of events. All the areas seeing the highest growth in rents right now are also parts of town with significant ongoing rehab projects and/or new construction. But be advised that other parts of town with building/rehabbing booms in the last 10-20 years, Downtown and Downtown West, saw 8.1 percent rent declines last year, now that the party is over. Just because growth is predicted, doesn’t mean it will come, and when everyone is convinced it will happen, watch out and hold onto your wallet. I collect rent on the duplex I own, and I have my reasons to think rents will rise some more, but let’s not get crazy here…

Plus, if like me you are benefiting from higher rents, realize that you may be in a pretty rarified group at this point. The fact is that although many of the small, duplex rental properties in our neighborhood were once owned by people who occupied them or lived nearby in the neighborhood, large operators such as Manor and Roberts Realty now rent out a large portion of the small multi-family buildings in the area. There aren’t too many of us small duplex owners left, and this increase in rents is often going to owners and investors who live outside the neighborhood. That’s a bit different than the larger (4-20 apartment) properties, which have been generally owned by bigger companies for a long time, with Washington University (in the form of Quadrangle Management and Parallel Properties) and Laurel Management (owned and operated by Mark Gorman, a lifelong neighborhood resident), currently playing an outsize role among the large residential buildings in the neighborhood that haven’t been converted to condominiums.

As shown by a recent open letter in The Times of Skinker DeBaliviere and quite a lot of buzz about the issue within the neighborhood and on the Nextdoor website, the next frontier for investors (for the moment) looks to be single family homes, often rented out to students in the form of (illegal if to more than three unrelated occupants) rooming houses. Professionals running their property like a business will likely charge the most profitable rent they can, but less scrupulous owners might do that even at the expense of following city zoning rules and regulations. Meanwhile, many “mom and pop,” owners, charging more or less the same rents to the same tenants, year after year, may start to wonder if they’re doing things the wrong way, as everyone else starts to bring in much more from their tenants. Some might wonder if maybe it’s time to sell to a bigger investor, and there is a line of people waiting to buy (at a discount, at least).

That’s all the more true when renovating a rental property to contemporary standards is much, much harder for an individual operator, between financing, dealing with contractors, deciphering the applicable rules and regulations, forgoing rent for an indefinite period, and potentially relocating from their personal home. It’s more expensive—in time, money, and inevitable mistakes—for small fry landlords to provide souped-up apartments to prospective tenants than for larger operators. And what did I say about not counting your chickens? Few of us would want renovating our house, and a tenant’s apartment to boot, to be a literal “bet the farm” decision. All-or-nothing renovation tax incentives play a major, if complicated, role in this story. In any event, small, law-abiding landlords, and in particular owner-occupants, may be turning into an endangered species based on simple economics.

Outside this limited group of rental owners, who don’t necessarily all benefit in the same way and in the same proportion, this recent increase in rents has some pretty mixed effects. If you rent, you’re more likely to see an increase in your monthly bills, stretching your budget and perhaps making your current home unaffordable. That’s pretty awful. If you own but like your neighbors who rent, you may soon be saying goodbye to several of them, as we recently have on my block. Because of the high student population, turnover in this neighborhood is generally high in the best of circumstances, making for a generally transient population in this neighborhood. With increasing rents, expect that to get worse. Higher rents are not unrelated to higher real estate prices over all, and many front yard conversations have been had, I am sure, over our recent increase in tax bills. For owners who are financially strapped, this breeds all the same problems that renters have with affordability, and potentially a need to move to cheaper housing. And guess what? Even duplex owners charging “below market” rents can fall into that category.

On the other hand, when rents (and home prices, for that matter) go up, the market for investments is likely to respond. No one with profit in mind is going to spend $100,000 to fix up a property with an expectation they will only get $1,000 more a year in rent. Not when certificates of deposit still have a positive interest rate, anyway. When the number is more like $10,000 more rent each year for your $100,000 investment, that changes. Walk through the neighborhood on any week day, and on practically every block you will see plenty of painters, tuckpointers, plumbers and carpenters hard at work. Those investments in an improved housing stock will soon be reflected in a shinier, “nicer”-looking neighborhood… and in even higher rents.

Anyone who has owned a house for long enough in this neighborhood should be aware that maintaining a 100 year-old brick home in good working order can sometimes involve some expensive repairs. Some big-ticket items, like tuck pointing and a new roof, can be deferred here and there to save some money, but the cost of waiting too long can be catastrophic. Other systems that have worked fine for 100 years (like the cast iron sewer pipes under my home that we just replaced), are now at the end of their natural life spans, and need expensive, wholesale replacement when that happens. Environmental issues, like lead and asbestos contamination, are a ticking time bomb in most if not all of the properties in this neighborhood, requiring substantial money and expertise to properly abate, and even more money to eliminate entirely.

If rents are too low, there’s simply no incentive to spend the large amounts of money sometimes required to keep an old home running properly, or at least an incentive to slowly let a home deteriorate, treating it merely like a “cash cow.” Investments like repairs and renovations happen far more often when there is a return on that investment. Absent that, and a neighborhood can easily fall into complete disrepair, as has happened to too many once-beautiful neighborhoods in this city. A certain amount of rent is needed if you want area homes to sustain a certain amount of habitability. Higher rents are at best a mixed blessing, but we may have to take the bad with the good.

So why are rents going up? Simply put, we live in a neighborhood where the demand for rental housing has gone up, while supply has not. Supply may have even decreased, since some places that once were rented are now owner-occupied condominiums instead. And with little developable land and stronger restrictions on development than most of the St. Louis area, don’t expect that to change. It’s hard to imagine a fall in rents here, like the Downtown West neighborhood in 2017, when there is little room for the neighborhood to become over-built, like Downtown West was in 2005, when it seems every warehouse became an apartment building at the same time. But why is demand increasing here? Well, it’s easier to speculate than to know, but some of this seems pretty obvious to me. Many good landlords in this neighborhood (Parallel, Laurel, and Quadrangle I know from firsthand experience, but I’m sure they’re not the only ones), have been putting a lot of money into making their apartments great places to live. It’s no surprise that an apartment with an in-unit laundry, updated kitchen and bathroom, and central air conditioning will have more tenants ready to pay more for it than it did when the laundry was a basement coin-op and the air conditioner was a window unit or a fan. But again, keeping up with contemporary standards in a 100 year-old building can be no simple task, and smaller owners face unique challenges in keeping things equally up-to-date.

This is also a great neighborhood, with amenities like restaurants and clubs on the Loop that are particularly attractive to young people, an outsize proportion of renters. Recent additions to our nearby commercial area include a grocery store, a concert hall with first-rate acts, an Italian bakery, an all-night diner, and numerous other restaurants. Again, it’s not surprising to me that a place where you can walk to the park, yoga, cafes, at least four music venues, and now even a grocery store is more popular with tenants than before some of those amenities existed. I’d guess that some of these changes take a while to filter into the perceptions of outsiders who might choose to rent here, but word is spreading.

Wider trends also come into play. Nationally, a higher proportion of people rent right now than did 10 years ago, and that change is most pronounced among younger age groups, who comprised most renters even before this change. And you need only look at data from the U.S. Census’ American Community Survey to know that Saint Louis City today, particularly among those ages 25-45, has substantially higher median income and education levels than it did 10 or even 3 years ago. Young renters with college degrees and money are either moving to the city or not moving away (also a national trend), with predictable effects on rent.

I also have my own pet theory about why rents have risen more here than other neighborhoods. It’s Washington University, its students, and the parents who often pay their rent. Wash U. subsidizes home purchases by its employees in our neighborhood, and recently raised their limit on downpayment assistance from 5 percent of the purchase price up to 120,000 dollars, to 170,000, or 8,500 dollars, forgivable over five years. This subsidy tends to put a distinct floor under the home prices in Skinker-DeBaliviere. For instance, when I sold my home in the Grove, with the same subsidy, it went for just shy of 170,000 to a Wash U. family. This subsidy to home prices probably has some effect on rents too. As mentioned, Wash U. has also funded major upgrades, at least indirectly, to our housing stock through Parallel and Quadrangle, which are owned by its endowment.

It also seems to me that Wash U. has substantially changed the perception among its students, intentionally or not, concerning which areas near campus are “good” and safe for them to rent, with our neighborhood a major beneficiary of this change in attitudes. I don’t know, for instance, if it has done the same for the Clayton-Demun neighborhood on the South side of campus, or for the many apartments buildings on Pershing and Forsyth to its West, but here on its North side Wash U. funds blue light security phones, mobile security patrols down our streets, and even free private transportation home for its students. I would expect that for many student-tenants, particularly from suburban areas, these factors may all come into play when convincing a parent to co-sign a lease in this neighborhood.

The fact of neighborhood security is of benefit to all of us who live in the neighborhood, as well as to Wash U. and its students; but the perception of neighborhood security among those outside the neighborhood is of most benefit to local landlords, and anyone selling a home and moving away. So if you’d like lower rent, and live in Skinker DeBaliviere, maybe start by telling everyone you can how you live in a free-fire zone! Otherwise, it seems to me that most of the factors driving higher rents in this neighborhood are unlikely to change too soon.

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