- Vacancy rate dropped to 2.5%
- New product is leasing up quickly at better rents than expected
- More than 2,500 units absorbed in 2013 and more than 5,600 new units expected in 2014
- Job growth will drive demand for new units
The Twin Cities market enjoyed a strong second half of the year in the multi-family market. Rents are growing steadily, and the vacancy rate dropped from 2.8% at mid-year to 2.5% at year end. In total, approximately 2,500 units were absorbed in 2013, which was more than what was delivered in terms of new construction.
New product is leasing up well throughout the metropolitan area. This is especially true in downtown Minneapolis and the North Loop, where they are drawing rents upwards of $2.20 psf. Developers on many of these new projects that came on line in 2013 ended up doing better than their pro forma and ahead of schedule. They also achieved rents that were 5-10% higher than expected.
Landlords of existing product are also enjoying the benefits of this strengthened market. In 2013, they were able to drive 4-5% rent increases on renewals. Some owners are not taking advantage of the market; often, they are managing to occupancy rather than generating revenue and are not asking for as much rent as the market will bear.
Surprisingly, average class A rents in the Twin Cities are $0.50-$1.00 psf lower than major markets such as Chicago and Boston even though the area’s median income is only slightly lower. This is good news for renters but suggests that there is still room to further grow rents.
Demand Driven By Jobs
The apartment boom in the Twin Cities over the past few years had been driven by foreclosures and “decoupling.” In the case of the former, people who lost their houses due to foreclosure moved back to the rental market for their housing needs. In the latter case, people moved in together during the recession and then started to split up. To a large degree, these drivers are no longer the predominant force in the housing market.
In 2013 and moving forward, demand for new units is expected come from job growth. According to the Current Employee Statistics (CES), more than 34,000 jobs were added from January through November 2013. Job growth and apartment development are inextricably linked, and thus developers in the Twin Cities will continue to move full speed ahead with new projects until some weakness in the job market begins to show.
Lenders More Open to Development
The multi-family market continues to be red hot for developers. However, as we move into 2014, there is a sense of waiting to see what happens when so many units come on line. With 5,600 units expected, how quickly they get filled will be telling about the depth of the market. If leasing is strong, planned projects will have more validity.
More banks now want to lend on these deals than in the past few years. They are very selective, and any hint of a location challenge will limit their interest. Ideally, banks want to finance class A projects in urban neighborhoods with a good walkability story and a nearby grocer and restaurants. The difficulty for developers in 2014 is that the best land sites have been taken or are currently in play. This is especially the case with downtown Minneapolis, the North Loop and Uptown.
While financing is more readily available, developers are facing rising construction costs, which are estimated to be up approximately 10-15% over the past two years. Despite all the development activity across the various product types, there just aren’t enough workers, contractors or materials to keep pace. The increased demand and the shortage of labor have caused a surge in prices. In response, some developers are skimping on the trimmings in their projects to cut costs. However, it is difficult to get first-tier rents if you are not delivering a first-tier product.
Downtown Minneapolis Activity
Of all the submarkets within the Twin Cities, downtown Minneapolis has shown the biggest appetite for new product. In 2014, 1,500 units are expected to come on line in the CBD alone, and numerous projects are in the pipeline. The majority of these apartments are priced high, making it the most expensive market in the greater metropolitan area. According to Marquette Advisors, downtown was enjoying an average monthly rent rate of $1,340 at mid-year. That’s 37% higher than the metro-wide average of $979.
Investors Buying and Selling
Investment activity in the multi-family market was steady for second-half 2013. As discussed, more units were delivered this past year than the last three combined. Everything has been well received and filled up quickly.
Volume is slightly up compared with last year as there was more than $450 million in sales for 2013. The market welcomed some new entrants after being dominated for some time by local investors.
Weidner Apartment Homes, based in Kirkland, Wash., bought the 361-unit Stoneleigh at the Reserve Apartments in Plymouth sold for $53 million at a 5.60% cap rate. It was the largest apartment transaction in the Minneapolis-St. Paul area in the past two years.
L&B Realty Advisers LLP, a Dallas-based real estate investment firm, purchased the 158-unit Lake Calhoun City Apartments in Minneapolis from Village Green Companies and The Ackerberg Group for $37.25 million, or $235,759 per unit, at a 4.6% cap rate.
Looking ahead to 2014, a few of the class A properties are expected to be up for sale, along with some smaller portfolios. Despite the market’s success, cap rates haven’t adjusted accordingly. Investors will be watching vacancy levels in the North Loop, Downtown Minneapolis and Uptown as part of their decision-making process.
Building off the success of this past year in the multi-family market, 5,600 units are coming on line in 2014 and another 3,000-6,000 are forecast for 2015. As long as the area continues to enjoy steady job growth, developers will likely charge ahead with their many planned projects.
While developers are seeing a smaller return on costs, their demand for new projects is still high. And with interest rates staying low and more banks willing to provide financing, the multi-family market will likely continue to be the talk of the town for 2014.
To read more, visit the January 2014 edition of Cushman & Wakefield/NorthMarq’s Compass report, now available online. Visit the web site: www.northmarqcompass.com