“On the road to recovery” summarizes the current Twin Cities rental market. After several years of stagnant rents and above-market equilibrium vacancy rates, the market is again moving in the right direction. The first quarter vacancy rate this year was 4.4 percent, down from 5.6 percent a year ago. Two years ago, vacancies had climbed to roughly 7.5 percent, considered high for this smaller market. Annualized rent growth for the first quarter of 2007 was 2.4 percent.
Now, concessions have all but disappeared. What's more, according to developers, owners, and property management companies, 2006-07 has been the first year of solid rent growth in about five years. New projects are under construction, with a few more planned to break ground this year. Most of these new developments are located in historically strong locations that support upscale rents and have exhibited higher levels of rent growth.
Because of a traditionally strong local market and generally limited number of institutional-grade properties, multifamily properties in the Twin Cities are currently trading at historically aggressive cap rates—in the low to mid 5s for Class A properties and between 6 percent and 7 percent for Class B properties, according to Gina Dingman, vice president and chairman of Colliers Multifamily Group of North America. The highly aggressive cap rates reflect the lack of supply and plentiful capital, and Dingman expects the ongoing abundance of capital in the market to keep fueling the trend.
DOWNTOWN DRAWS Most of the new development that has come online over the past few years has been concentrated in the two central cities of Minneapolis and St. Paul, usually on redevelopment sites. Mixed-income developments, several with street-level commercial space, have enjoyed good market acceptance. City Walk apartments in Woodbury, originally planned as a rental community, briefly converted to condominium before converting back to rental, and absorption has been strong.
New apartment properties include the 313-unit River Crossings, the 344-unit Riverview at Upper Landing, and the 267-unit 808 Berry Place—all in St. Paul—and the 162-unit Uptown City Apartments in Minneapolis. Four developments now under construction are Eitel City Apartments (200 units), Hiawatha Flats (260 units), Lake Calhoun City Apartments (163 units), and Founder's Circle Apartments (195 units). Still more will break ground in the next year or so.
Condo conversions occurred only sparsely in the Twin Cities. The largest and most notable conversions occurred primarily in the southwest quadrant (Eden Prairie and Minnetonka) and in the downtowns of Minneapolis and St. Paul. Smaller 1950s and 1960s buildings and older brownstones were also converted in high-amenity inner-city districts where the price of for-sale housing has long been out of reach for first-time buyers. Condos finally put these amenity-laden locations within reach of first-time buyers and allowed them to remain in the areas where they had been renting.
Some concern emerged that the rental market in down town Minneapolis would be affected negatively by investor condo units being rented alongside traditional rentals. While the number of investor condo rentals has increased, these units are generally at the top end of the market and have not significantly affected the overall traditional rental market.
New units along the Twin Cities' first light rail line have also proven to be successful. Oaks at Hiawatha Station (61 units) leased up rapidly. The same developer has undertaken a second, more ambitious development two blocks north of this property.
Hiawatha Flats is under construction and scheduled to begin leasing on the first phase of the development within a couple of months. An extensive amenities package is planned, with rents beginning at $1,200 for a 600-square-foot one-bedroom unit. According to the developer, renters have been willing to pay a premium for units on the light rail line, and a relatively high proportion of residents—up to 30 percent—do not own a vehicle. A shared car for errands and trips will be available for residents to sign out.