Strong Demand for Apartments Continues as Rents Climb, Development Boom Continues

The Twin Cities apartment development boom continues full steam ahead. This explosive construction activity, however, has not pushed up vacancy rates or slowed rental rate increases.

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Despite the 620 new units delivered in the first quarter—primarily in hip, urban core markets—the overall multi-family vacancy rate dropped slightly to 2.8%, reported Marquette Advisors. The vacancy rate has been below 3% for eight consecutive quarters.

Absorption continued to outpace new construction, and strong preleasing is reported at prime, well-located projects under construction. For example, the first phase of Doran Cos.’ 180-unit, upscale Mill & Main in Minneapolis opened 70% preleased. An additional 2,180 units are expected to be delivered by year end with thousands more underway and planned.

Downtown and Uptown Minneapolis accounted for more than 40% of all apartment construction since December 2011. During the past 15 months, 760 new units were delivered in downtown Minneapolis (including the North Loop) and Southwest Minneapolis (including Uptown). However, these submarkets reported vacancy rates of 2.2% and 2.1%, respectively.

Forty-eight of the 54 submarkets tracked posted vacancy rates of 3.5% or lower. The city of Minneapolis is at 1.9%. Eden Prairie is 2.6%, and Burnsville is 2.9%. Downtown St. Paul is slightly higher at 3.9%. The metro boasts one of the lowest vacancy rates in the country. The national apartment vacancy rate is 4.3%.

Outlook
The market should continue to be strong, fueled by job growth and strong demographic trends as more baby boomers and Generation Y opt for the renting lifestyle. A surge of transaction activity is anticipated in the second half of the year.

Rent growth is projected to increase 4-5% through year end. Vacancy will likely be flat due to the surge of new units opening. Pockets like downtown Minneapolis could see vacancy rates jump to 8-10% in the next couple of years with all of these units hitting at the same time.

One significant question is what will happen when three new apartment towers open downtown. There will be 1,500 new units with rents of $2.50 per square foot (psf). Downtown Minneapolis is already feeling the impact of new construction as its vacancy rate rose to 2.2% from 1.9% one year ago. Projects in the most favorable locations will continue to perform best.

To read more, visit the July 2013 edition of Cushman & Wakefield/NorthMarq’s Compass report, now available online.  Visit the web site: www.northmarqcompass.com

About Cushman & Wakefield/NorthMarq

​Cushman & Wakefield/NorthMarq is a joint venture formed in September 2011 by NorthMarq Real Estate Services and the Minnesota operations of global real estate services firm Cushman & Wakefield. By combining the talent of both organizations at the regional level with the global platform of Cushman & Wakefield, we offer clients the best combination of regional strength and global capabilities. The result: the leading commercial real estate firm by all measures in the Upper Midwest.
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