Shiny new sports stadiums reflect the confidence and strength that permeate the Twin Cities marketplace today. The successful completion of beautiful Target Field for the Minnesota Twins as well as TCF Bank Stadium for the Minnesota Gophers, not to mention the possible stadium development that is on the table for the Minnesota Vikings—all of which happened during the recent recession—is a reflection of the strength of Minneapolis and St. Paul. Indeed, the Twin Cities have always boasted a diverse, high-paid services sector and highly educated workforce. In fact, the metro can claim that one-third of its adults have at least a bachelor’s degree—the highest percentage in the Midwest. So it’s no wonder that the Twin Cities are home to a robust 18 Fortune 500 companies. Some of the Twin Cities’ top employers include Target Corp., Wells Fargo, 3M, United Health Group, Allina Health System, Fairview Health System, Medtronic, Best Buy, Cargill, Boston Scientific, and General Mills. With these and other diverse firms calling the Twin Cities home, the metro’s unemployment rate has remained nearly 3 percentage points lower than the national average (6.7 percent versus 9.3 percent, as of July 2011).
Furthermore, Minneapolis/St. Paul, unlike most metros in the Midwest, has maintained a positive net migration over the past decade. This is mainly due to the University of Minnesota’s and other major research facilities, and a very favorable industrial structure attracting highly educated foreign migrants. As a result, the population is also relatively young, at, on average, 36.3 years of age.
All of these factors helped apartment owners in the metro weather the recent downturn better than most. Now, the future continues to look bright for property managers in terms of occupancy, with extremely high demand for rental housing, few deliveries, and positive economic indications. No wonder the Twin Cities apartment industry is witnessing one of the strongest multifamily markets in the country right now. Sitting Pretty
The metrics in Minneapolis/St. Paul speak for themselves.
With an outstandingly low average vacancy rate of 2.4 percent, the Twin Cities enjoy one of the tightest occupancy levels in the United States. Vacancy has trended down from 5 percent in 2010 to 3.4 percent in the first quarter of 2011 to the current lows. These strong occupancy figures have also produced solid absorption rates, with a positive 1,200 units reported in the second quarter of 2011 and more than 3,400 in total absorption for the first half of the year. Even during the peak of the recession, the Twin Cities’ average vacancy level did not pass the 6 percent mark (it reached that number in 2009), another true reflection of this solid metro’s annual performance.
A look at specific submarkets reveals an even more dramatic tightening of occupancies in the Twin Cities. Marquette Advisors recently reported that downtown Minneapolis vacancy rates declined from 6 percent in 2010 to 1.2 percent as of mid-2011. Furthermore, the uptown submarket of Minneapolis stands at a current vacancy rate of 1.9 percent. Lastly, St. Paul’s downtown submarket has posted remarkable vacancy declines from a year ago, moving from 7.1 percent in 2010 to a paltry 0.8 percent as of June 2011.
Along with this sudden downturn in vacancies throughout the metro, asking rents have begun to move up. PPR is projecting average annual rent growth of nearly 3 percent in 2012 and nearing 4 percent in 2013. PPR’s overall projection puts the Twin Cities above any market in the Midwest, including Chicago. Future years look even better for owners, with Reis projecting nearly 5 percent annual rent growth in 2014 and 2015, making the Twin Cities its No. 1 Midwest market and No. 7 out of 82 U.S. markets it covers in its five-year forecast.
Moreover, effective rents are expected to grow even more quickly than market rents as concessions steadily burn off. Marquette Advisors also reports a decline in concessions—12-month leases will see a very modest, $260-per-year average concession. Due to the tight market, most concessions are coming in the form of “look and lease” on select units or via reduced application or security-deposit fees.
Light on Transactions
The Twin Cities have witnessed a fairly light year in terms of transactions. The most significant trade recently has been the sale of Park Place in Plymouth. Invesco sold the 500-unit community to Greystar in September for $54.7 million. Additionally, CAPREIT/Praedium purchased the 202-unit Shenandoah Apartments in Shakopee for $19 million.
Earlier this year, RREEF sold the 534-unit Hampshire Hill Apartments to Westdale Investment Partners for $87,000 per unit, and in January, Waterton purchased Stratford Wood in Minnetonka for $21.3 million. In 2010, LaSalle Investment Partners was the most active seller in the market, transacting three major deals in the latter half of the year. LaSalle sold White Bear Woods in White Bear Lake, Valley Creek in Woodbury, and Southview Gables in Inver Grove Heights. Cranes in the Air
With the apartment market clearly flexing its muscles, it is inevitable that construction cranes are beginning to be seen at new development sites. Developments that were shelved in 2007, 2008, and 2009 are now seeing new life as the metro market tightens and debt and equity firms seek solid opportunities.
The Twin Cities have seen little new supply delivered over the past five years—the annual average has been 699 units. In fact, the two years ending in the fourth quarter of 2012 will be one of the lightest delivery periods for the metro on record. Over the next five years, an annual average of 1,200 units are projected to be constructed throughout the metro, but these deliveries should have only a slight impact on vacancies, with projections of vacancy rates remaining below 4 percent over the next five years. New developments making their way to completion include Uptown at City Walk in Woodbury, being developed by LeCesse, which is set to deliver 242 units by the end of 2011. Greco’s Flux community, which will include 216 units in uptown, is expected to deliver early 2012. Village Green’s 175-unit Mill District City Apartments also delivered earlier this year in downtown Minneapolis. Additionally, Opus Development recently announced its plans to build a 33-story, 330-unit luxury apartment tower in the heart of downtown Minneapolis. If completed, the tower will be the first residential high-rise built in Minneapolis in nearly 30 years. Meanwhile, Hines has set its sights on the development of Dock Street Apartments, which would be located just east of Target Field and include 178 units.
Downtown Minneapolis and St. Paul are expected to see a nice chunk of new apartment development in the near term, especially as urban markets continue to attract young professionals who want to reside close to employment and take advantage of entertainment and public transportation options available in these areas. Developers and landlords alike should see positive results as the demand for apartments remains robust in the Twin Cities.
