Record Amount of Development Activity in Multi-Family Sector Attracting Investors

The multi-family sector in the Twin Cities market continues to be strong. The market delivered 1,500 units so far this year, and another 5,000 are expected to open by year end.

The vacancy rate edged up slightly from 2.5% in fourth-quarter 2013 to 2.7% in first-quarter 2014. This uptick is due to the large number of units that came on line and slowing job growth in the first half of the year. Metro employment increased by only 900 jobs in the first quarter, according to the Minnesota Department of Employment and Economic Development.

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The overall average market rent in the Twin Cities metro area for first quarter crossed the $1,000 threshold, marking a 3.5% increase year over year. Thanks to a significant amount of new luxury product, the average market rent in downtown Minneapolis is up 9.1% year over year.

Concessions have been limited and not too widespread in 2014. As more product comes on line in late summer, concessions may increase, but overall the new units should be absorbed relatively quickly.

The majority of activity in the greater metropolitan area has been focused on downtown Minneapolis, especially the North Loop and Downtown East neighborhoods. As of early June, there were 1,322 proposed apartments, 451 that received approval, and another 2,073 under construction in the city of Minneapolis. Developers are also grabbing quality sites in select areas in first-ring suburbs such as Edina and St. Louis Park.

Notable Activity
The following projects were completed in first-half 2014 and opened their doors to tenants:

  • Elan Uptown Phase I in Uptown (388 units)
  • LIME Apartments in Uptown (174 units)
  • The Penfield in downtown St. Paul (254 units)
  • Soo Line Apartments in downtown Minneapolis (254 units)
  • The Walkway in Uptown (92 units)
  • West Side Flats in St. Paul (178 units)

Construction is wrapping up on the following notable projects, all of which will be delivered in second-half 2014:

  • Arcata in St. Louis Park (165 units)
  • Junction Flats in the North Loop of downtown Minneapolis (182 units)
  • LPM in downtown Minneapolis (354 units)
  • Mill & Main II in Minneapolis (162 units)
  • One Southdale Place in Edina (232 units)
  • Nic on Fifth in downtown Minneapolis (253 units)
  • Red 20 in Northeast Minneapolis (130 units)
  • Velo in the North Loop of downtown Minneapolis (101 units)
  • The Paxon, also in the North Loop (139 units)

Some of the projects attracting attention that are currently under construction and set to be complete in 2015 include the following:

  • 71 France / Byerly’s redevelopment in Edina (246 units)
  • A-Mill Artist Lofts in the St. Anthony Main neighborhood of Minneapolis (251 units)
  • Latitude 45 in downtown Minneapolis (320 units)
  • Luxembourg in Bloomington (282 units)

Anticipated ground breakings in the second half include:

  • Dolce West End project in St. Louis Park (158 units)
  • Encore in downtown Minneapolis (123 units)

Overall, an estimated 5,600 units are coming on line in 2014 and another 3,000-6,000 are forecast for 2015. As long as the metropolitan area continues to enjoy steady job growth, developers will likely charge ahead with their planned projects.

Investment Market
Roughly $220 million in apartment sales closed in the first half, and sale volume is expected to pick up significantly in the second half of the year. Investors are lining up, including REITS, pension funds, private equity investors and institutional groups. While all classes of product are drawing interest, some investors are being selective by targeting high-quality, core product. Heavy bidding is occurring for urban class A properties.

In the past six months, cap rates have been surprising on the low side due to increasing investor demand and a recent drop in the 10-year Treasury rate. The Vue Apartments in Minneapolis sold for $30.8 million and a record-high price per unit of $258,823. Cap rates for “perfect” deals—such as new downtown or Uptown Minneapolis developments that are transit-oriented and amenity-rich—could drop to new record lows.

An interesting trend over the past 12-18 months is that many investors are buying class B and C properties at current market prices with the assumption that they can renovate and achieve sale prices that have never been seen. Both equity and debt are underwriting these optimistic assumptions for the future.

Vacancy will likely go up a bit more in second-half 2014 because so many more units are coming on line. There is continued strength in leasing, and these new units should be absorbed relatively quickly. Many of these urban developments are realizing strong prelease activity.

Among all the activity in downtown Minneapolis, the majority of development dollars are now being concentrated on the Downtown East neighborhood. It estimated that due to Ryan’s mixed-use development, the new Vikings Stadium and the planned redevelopment of Thresher Square there is more than $3 billion being invested within a five-square-block radius. Arguably, this is the highest concentration of development dollars per city block in the country outside of Manhattan. It’s attracting the attention of investors and analysts who are waiting as Downtown East transforms over the next 18 months.

To read more, visit the July 2014 edition of Cushman & Wakefield/NorthMarq’s Compass report, now available online.  Visit the web site:

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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