The rental rates will likely go up from 2% to 3% in the next year or so. One reason is asoftening in the market. Although the vacancy rates are reported to be in the 1.5% to 2.5% range, Appert thinks the actual range is more likely in the 3% to 5% range.

"Some owner/managers have reported vacancies in the 8% to 10% area for certain properties," Appert says.

Meanwhile, Tom Cooper, co-partner in Minnesota Brokerage Group, says vacancy rates will likely to be highest in the higher-ended properties, which will be more likely to feel the effects of new construction and tenants who buy their own homes.

Both Cooper and Appert anticipate new construction will increase, in part due to lower property taxes. But it will still be constrained by a lack of desirable sites and high construction costs.

On the bright side, Appert reports property tax reform efforts in the Minnesota Legislature this year will produce a drop in the tax rates from its current level of about 2.4% to 1.25% in 2004.

"Lower taxes will allow for greater competition in the market, while at the same time more fairly tax renters," Appert says.

That said, Cooper warns that "owners will be somewhat stunned with the aggressive assessed value increases in their buildings." After all, sales of these properties have shown a sharp increase in market values, he adds. Property sales have been fueled bylow mortgage rates and rising rents.

"I suggest small gifts and attractive birthday cards for your assessor," Cooper quips.

Instant Insights /

Twin Cities Apartment Rents Likely to Subside

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