Report: Twin Cities Apartment Absorption Declines
By: Hank Long,  Finance & Commerce - January 30, 2017

(Source: Marquette Advisors)

(Source: Marquette Advisors)

While apartment development and absorption slowed in 2016, the Twin Cities area saw its sixth consecutive year with an average vacancy rate below 3 percent amid rising rents, according to the latest report by Marquette Advisors.

At some point the market will tilt in the direction of renters, right? Yes, but not yet, said Brent Wittenberg, vice president of the Minneapolis-based research and consulting company, which just released the fourth-quarter Apartment Trends report.

“A strong economy and consistently low unemployment are driving considerable in-migration to the region,” Wittenberg said Monday, “while new residents are responding positively to new apartments being constructed here.”

(Source: Marquette Advisors)

(Source: Marquette Advisors)

While absorption declined to 2,621 units last year from the near record of 3,928 units in 2015, that’s still an “impressive” number and “demonstrates continued strong demand fundamentals” for the multifamily market, Wittenberg said.

The market completed 3,138 units during 2016, down slightly from 3,335 in 2015.

With another 4,000 units are expected to open during the next 12 months, Marquette Advisors predicts the vacancy rate will increase a bit but remain under 5 percent.

“We expect to see absorption of 2,000 to 2,500 units annually over the next three or so years,” Wittenberg said.

The metro-wide vacancy rate increased to 2.7 percent at the end of 2016, up from 2.3 percent one year ago. The average market rent rose 4 percent from $1,053 to $1,095 during that same period.

Submarkets with large, high-end apartment complexes opening in the last year saw the largest increase in average rents. Besides downtown Minneapolis and St. Paul, suburbs including Apple Valley, Brooklyn Park and Maple Grove measured year-over-year rent increases of at least 5 percent, according to the Apartment Trends report.

“There is absolutely demand for new product in the suburbs, starting with the most ‘urban’ and dynamic suburban locations,” Wittenberg said. Suburban projects with “walkability” and “connectivity” to transit and major freeways will continue to appeal to renters, he added.

In downtown Minneapolis – the Twin Cities priciest submarket – average rent was $1,580 at the end of 2016, a 5 percent increase from one year ago. That’s despite a slight uptick in the vacancy rate, which was 4.6 percent at the end of 2016, up from 4.2 percent one year ago. But the vacancy rate for all downtown properties, including new apartments still in lease-up, declined to 5.4 percent from 8 percent at the end of 2015.

During the past three years, 4,030 units were completed in downtown Minneapolis and 3,635 units were absorbed.

“We expect the downtown Minneapolis vacancy rate will hold fairly steady during 2017,” Wittenberg said, as another 660 units are expected to be completed.

But with as many as 2,500 new units expected to open in 2018 and 2019, the submarket will become increasingly competitive, he added.

“These supply increases, paired with price-sensitivity from young millennial renters, are likely to create more downward pressure on rents over the long term,” he said.

Across the river in downtown St. Paul, the average rent increased from $1,420 one year ago to $1,460.

While the vacancy rate in that submarket rose from 3.8 percent to 5.9 percent during that same period, Wittenberg believes the uptick is temporary “as new product is being absorbed.”

“The downtown St. Paul market is in very good shape,” he said, “as renters have shown a very positive response to new apartments there. Since 2014, rents have increased by 8.3 percent.

Units priced at the top of the Twin Cities market are showing signs of softening, Marquette Advisors reported.

Across the metro, apartments renting for $1,400 or less saw average vacancy rates range between 2 and 3.6 percent, but those priced more than $1,400 have proved harder to fill. Apartments priced between $1,401 and $1,500 had a 4.6 percent vacancy rate.

Units priced higher than $1,500 had a 6.8 percent vacancy rate during the fourth quarter of 2016, up from 6.3 percent one year ago.

Empty nesters are helping absorb the pricier units, as they show a preference for larger apartments, but are “very particular about product and location,” Wittenberg said. Young millennials are also now “showing a preference for smaller, somewhat less expensive rental options,” he added.

Developers like Daniel Oberpriller, principal of CPM Cos., are trying to cater to those preferences.

Minneapolis-based CPM, which develops apartments in the urban core, has several projects in the works that offer smaller units for more affordable rents, Oberpriller said.

“The larger units are a great option for a lot of people, and sometimes the first to rent in a new complex, but there aren’t as many people that can pay” that price rangeOberpriller said. “The (rental) housing market is healthy, and people want to live in those good locations, but they are watching their pennies and their dollars.”