Wittenberg

In the Minneapolis multifamily market, two major developments have recently come online and four others have recently expanded, significantly increasing unit supply, according to Brent Wittenberg, vice president with Minneapolis-based GVA Marquette Advisors. These projects brought 700 new units to the market in the 3rd quarter of 2003 and include Mainstreet Village in New Brighton; Stone Arch Apartments in Minneapolis; Cornelia Place in Edina; Stoneliegh at the Reserve in Plymouth; Excelsior & Grand in St. Louis Park; and Waterstone Place in Minnetonka. During the 4th quarter of 2003, additional multifamily developments opened including Urban Park Apartments in St. Louis Park (90 units), 808 Berry in Minneapolis (267 units), Hearthstone in Apple Valley (228 units), and Grand Marketplace in Burnsville (113 units).

The attractive homeownership market, with consistently favorable mortgage rates and stagnant job growth, are also contributing to the soft luxury market. Luxury communities with rents of $1,100 or more per month have a vacancy rate of 9.4 percent. “This is an improvement from 9.7 percent last quarter, which may indicate the beginning of a recovery for the upscale apartment market,” Wittenberg says. “However, many communities have been forced to slash rents and offer significant concessions, which shows downward pressure on economic vacancy and net operating income while absorption is occurring.”

In recent months, former renters of middle-market apartment communities have upgraded to upscale rental units, taking advantage of concessions and lower rental rates. Some workforce households are taking advantage of homeownership opportunities, resulting in increased vacancy for the workforce rental stock (rents between $700 and $1,100). This group of rental communities has a vacancy rate of 6.8 percent, which is up from 6.2 percent last quarter and 4.6 percent 1 year ago. The affordable market (units with rents of $700 per month or less) has a vacancy rate of 6 percent, which is up slightly from 5.9 percent last quarter and 4.3 percent 1 year ago.

In the 3rd quarter of 2003, the market vacancy rate rose to 7 percent from 6.7 percent last quarter and 5.2 percent 1 year ago. The average rent has increased just $5 (0.6 percent) during the past 12 months.

Higher vacancy rates in the workforce and affordable rental markets relate to the stagnant job market, although economic conditions in the Twin Cities are favorable compared to other parts of the country. According to the Minnesota Department of Economic Security, unemployment in the Twin Cities is currently 4.1 percent, compared to 6 percent nationwide. “Our region benefits from a diversified economy that is expected to recover more quickly than most others,” Wittenberg says. “When job growth returns, we expect a decline in the apartment vacancy rate, with the affordable and workforce units filling first.” Average rents at new rental communities in the Twin Cities range from about $800 for studio units to more than $2,000 in most cases.

“We’re seeing development on infill sites throughout the region,” Wittenberg says. “Higher density, mixed-use projects that incorporate apartments, shopping, restaurants and public space are becoming more common in urban and suburban locations. This phenomenon is driven by the scarcity of development sites and the necessity to build at higher densities to support rising land costs.”

National development companies such as JPI, North American Properties, Village Green and Slosburg entered the market during the past 2 years and have recently completed projects in the area. Del American is planning a large mixed-use project in Woodbury. These firms, along with a handful of local developers, have accounted for much of the new product in the region during the past 12 months.

Eden Prairie, Plymouth/Maple Grove, Minnetonka, Woodbury and Downtown Minneapolis are high-rent submarkets with current vacancy rates exceeding 7 percent and additional development projects underway or planned. “These markets are strong job centers or have access to major highways, linking them to job centers,” Wittenberg says. “The long-term outlook is positive for these areas when job growth returns to the region.”

Approximately, 2,700 units were built during 2003, and between 2,000 to 2,500 will come online during 2004. The vacancy rate should increase slightly during the first half of 2004 as additional units are added. The market will remain competitive during the winter months, and an improvement in occupancy is possible beginning in the spring if job growth improves, Wittenberg says.

“The long-term outlook for the Twin Cities apartment market is very positive,” Wittenberg says. The region created 25,000 to 30,000 new jobs per year during the 1990s. Job growth is expected to return at a similar rate when the economy recovers and, in turn, apartment demand will increase. The affordable and workforce units will fill first. The luxury apartment market may take longer to respond, particularly if mortgage rates remain low.

Regional stats noted herein are for the seven-county metro area. Data presented is based on GVA Marquette Advisors’ proprietary apartment database, which is composed of more than 160,000 rental units.


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