MINNEAPOLIS—The multifamily market in much of the US has been soaring as millennial-aged people have increasingly decided to put off buying homes. Instead, many now want to pay rent on units in urban core areas. In addition, many boomers have followed them into the cities in order to establish second-homes, or perhaps primary residences that won't require the upkeep that suburban houses need. And although this trend has blossomed in many metro areas, few regions have experienced the level of economic growth recently seen in the Twin Cities, and as a result, its multifamily market has outpaced most others in both demand and new development.
Even though developers have added more than 13,000 multifamily units to the region since 2013, a tremendous level of demand remains, according to a new report just published by Minneapolis-based NAI Everest. Vacancy rates in the Twin Cities averaged just 2.3% in the third quarter, the researchers find. The non-downtown St. Paul submarket had, at 1.4%, the lowest rate in the region. Downtown Minneapolis vacancy rates averaged 6.4% and downtown St. Paul rates averaged 2.8%. "The higher than average vacancy rates in the downtown areas is primarily due to the large volume of new units delivered that are still in lease-up."
And the massive number of units delivered has not stopped a solid escalation in the metro's rental rates, which increased an average of 5.7% year-over-year, according to NAI Everest. The largest increases were the 8.1% boost for non-downtown Minneapolis, and the 6.8% for downtown St. Paul. Absorption totaled 1,173 units, while developers delivered another 1,276 units in the third quarter.
The robust market has certainly not escaped the attention of investors. "Currently, the Twin Cities are on pace to exceed $1 billion in sales volume for 2015, which will break the record volume in 2014 of $937.2 million," NAI Everest says. "Historically low interest rates, a surplus of capital, investors chasing yield and outstanding fundamentals have fueled an aggressive sales market." Perhaps most impressive, the average price per unit in the Twin Cities just hit $132,405, a 29% increase from the previous year. Investors have paid the most attention to well-located class A urban and first-ring suburban assets as well as value-add assets across the metro area.
Developers put the finishing touches on two market-rate projects in Minneapolis during the third quarter and tenants have flocked to these properties in impressive numbers. Latitude 45, for example, a 318 unit mid-rise development in downtown Minneapolis, opened in September and was 66% leased by the end of October, NAI Everest says. And Elements of Linden Hills is a 31-unit property in the Uptown neighborhood of Minneapolis which was 55% leased within one month of opening.
New suburban developments continue to lease up quickly as well. Siena Apartments, a 138-unit project in St. Louis Park, opened in July and tenants leased 85% of the units by the end of October. And the first phase of 71 France, a 246-unit project in Edina, opened in September and was 42% leased within one month.
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