HEARTLAND SNAPSHOT, JULY 2005

MINNEAPOLIS/ST. PAUL MULTIFAMILY MARKET

In the Minneapolis/St. Paul apartment market, physical vacancy peaked at 7.6 percent in mid-2003. However, with concessions factored in, there were economic vacancy levels exceeding 15 percent. Since then, progress has been made, but the pace of the recovery has been frustratingly slow. Physical vacancy has declined to 6.9 percent market-wide (first quarter 2005) and concessions have moderated considerably during the past 6 months. Urban and close-in suburban markets continue to out-perform second and third tier suburban locations.

Construction on the apartment side has slowed in the Twin Cities. Fewer than 1,000 units are expected to come on line during 2005, compared to more than 2,000 each year during the past 2 years. Apartment-to-condominium conversions are expected to actually outpace new apartment construction this year. Meanwhile, demand fundamentals have shown a slight improvement during recent months tied to the modest job growth that has returned to the region. The market’s renter population is poorer than ever, however. Middle to upper-income renters continue their exodus to the homeownership market. The renters replacing them are less affluent, as the lion’s share of new jobs in entry-level positions are in low paying sectors. So, while occupancy levels should improve and concessions are likely to burn off during the coming year, there appears to be no real rent growth in sight.

The condominium market in the Minneapolis/St. Paul region is hot. Consistent demand for condominiums, particularly in urban locations and high-amenity suburban markets, is expected. Demand could in fact increase if the region starts creating jobs at a robust pace. However, each day seems to bring the announcement of another condominium project, with most of that activity occurring in and around downtown Minneapolis. That submarket in particular is becoming increasingly competitive.

More than 2,100 condominiums were built in the market during 2004, with more than 700 of those in downtown Minneapolis. More than 40 new projects are proposed for downtown, with a total of 6,200 units. Though not a “24-hour” neighborhood yet, downtown is emerging as the region’s lifestyle neighborhood of choice, and demand for downtown living should increase.

On the apartment side, there have been new projects in the western suburbs of Eden Prairie, Maple Grove and Plymouth during the past 24 months. The far southeastern suburb of Rosemount saw the addition of two apartment communities in 2004. Developers have also completed infill projects at neighborhood locations in both Minneapolis and St. Paul.

Much of the condominium development in the Twin Cities is being done by local development firms, but others are looking to get into the mix, particularly in downtown Minneapolis. Miami-based Crescent Heights recently purchased The Falls and The Pinnacle apartment towers overlooking the Mississippi River and downtown Minneaoplis. They are in the process of converting those 257 units to condominiums and are evaluating other conversion opportunities.

Dominium has been the most active developer on the apartment side, recently completing projects in St. Paul, Eden Prairie and Plymouth. They have another project in development now in St. Anthony. Village Green finished two projects in the Uptown neighborhood of south Minneapolis last year. Development has slowed however, in light of soft market conditions. 

Mostly upscale mid-rise apartment product is being put on the market, targeting the affluent lifestyle renter. Much of the region’s Class A apartment stock is dated and frankly does not compete well with modern apartment and/or condominium housing offering a superior finish quality and amenity base demanded by this segment. Despite soft market conditions, apartment developers have worked to penetrate this unmet market niche. Recent apartment projects targeting this segment include Dominium’s Bluffs at 9 Mile Creek (Eden Prairie) and 808 Berry (St. Paul); Village Green’s Uptown City Apartments (Minneapolis); TOLD Development’s Excelsior & Grand (St. Louis Park); and Steven-Scott’s Cornelia Place (Edina). 

The average market rent is currently $850, with the average “effective rent” (net of concessions) at approximately $815 per month. Concessions have moderated, and currently average about one half month free. With the slight improvement in demand, and considering the slow-down in construction activity, concessions are anticipated to burn off in full in the coming 12 months.

Physical vacancy is currently at 6.9 percent for the region, compared to economic vacancy at 13.9 percent as of the first quarter this year. Class A apartments continue to lag in occupancy, as do most second and third ring suburban markets. Market vacancy (physical) should improve to around 6 percent in the coming 12 months, but Class B and C buildings will fill first.

Downtown Minneapolis, with more than 6,200 condominiums in the pipeline, is the area to watch in the near future. Real demand is expected to remain at about 1,000 units per year in this submarket, with an uptick possible if considerable job growth returns. With more than 700 apartment units now being converted in downtown (about 15 percent of the total rental supply), it will be interesting to watch the impact on apartment occupancy and rent levels.

Two major residential development projects, the Upper Landing (600 units) and Gateway Village (573 units), are underway in St. Paul, bringing a mix of for-sale, market rate rental and senior housing units on line this year. Of the 1,000 market rate apartment units expected to come on line region-wide during 2005, 700 will be in St. Paul.

Developers are also moving into urban neighborhoods (particularly in south Minneapolis) and close-in suburban locations. The market is showing an increasing preference for new, contemporary housing product in urban and close-in suburban locations as not everyone can afford to (or wants to) live downtown. Smaller-scale infill condominium projects are coming on to the market, transforming several neighborhoods in south Minneapolis in particular. Meanwhile, larger mixed-use projects incorporating a variety of housing options along with commercial uses and public spaces will come online in close-in suburbs such as St. Anthony (The Landings at St. Anthony Village) and Roseville (Twin Lakes).

The Bloomington Central Station development, located on the Hiawatha Light Rail Line near the Mall of America, got underway this past year and will serve as a model for transit-oriented development in this region. When complete, it will incorporate more than 1,200 housing units, along with a range of retail, restaurant and office uses, parks and public spaces. Based on its popularity thus far, more developers are expected to target the Hiawatha Rail Line with for-sale and rental projects in the coming months.

— Brent Wittenberg is vice president with Minneapolis-based GVA Marquette Advisors.

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