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TWIN CITIES APARTMENT DEVELOPMENT HAS BEEN ON A TEAR

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It’s been another busy year for the multifamily sector with booming new construction levels, continuing strong renter demand and robust investment sales activity. But is the sector peaking? What’s in store for 2020?

By Liz Wolf

It’s probably safe to say the Twin Cities apartment market has blown past expectations.

Strong market fundamentals, a healthy economy and a tight single-family housing market have extended the Twin Cities multifamily boom. The metro continues to boast one of the lowest vacancy rates in the U.S., which is driving both development and investor demand.

“It seems again that we’re at a point where the runway still feels very long and very wide in this industry,” says Josh Talberg, senior vice president in the Minneapolis office of JLL Capital Markets, specializing in multifamily assets. For the third year in a row, Twin Cities apartment deliveries “shattered the previous year’s peak,” according to

Nuveen Investments acquired the 216-unit Flux Apartments in Uptown Minneapolis for $54 million from PNC Realty. Keith Collins, Abe Appert and Ted Abramson of CBRE represented the seller.

Photo By Heinrich Photography

Golden Valley-based Maxfield Research and Consulting.

Maxfield projected 7,256 new units (both market rate and affordable) would come on line in 2019, up from the 6,164 new units delivered in 2018. Suburban development will account for 53 percent of the new product in 2019. Minneapolis proper will account for 31.4 percent of all deliveries in the metro area.

Looking ahead, 11,238 units are in the construction pipeline for 2020, according to Maxfield. (Many of those are phased developments). In 2020, Minneapolis proper will account for 42.6 percent of all deliveries in the metro.

Apartment to page 14 Rent growth is on the rise

Historically, rent growth in the Twin Cities has been lower than the national average, notes Matt Mullins, vice president at Maxfield. However, the metro’s rent growth in 2019 is roughly 3.7 percent, which is one of the higher percentage growth rates in the U.S. (The national average is 3.1 percent).

Mullins says rent growth is higher in the suburbs than Minneapolis. The abundance of new product in Minneapolis has kept rents in check as developers

growth in the warehouse sector, the company's forecast report says. Avison Young says that the volume of online sales could spur the need for ‘return centers’ in the local area as the demand for reverse logistics rises.

The report had plenty of good news for Columbus and central Ohio, too. Avison Young said that Central Ohio is poised for steady growth in 2020, having outperformed the national average during the past 10 years with GDP growth of more than 28 percent and employment growth of 22 percent. Significant growth in the industrial sector, fueled by the Columbus area's proximity to surrounding major markets, low cost of living, low taxes and low cost of land has helped establish Central Ohio as a major industrial and distribution hub for the Midwest.

Last year was a record-setting year for the Columbus industrial market, with nearly 6 million square feet of net absorption within the first three quarters of the year alone. The Columbus industrial market added more than 5 million square feet of industrial space for the second consecutive year in 2019. Asking rental rates have reached Industrial From page 1 an all-time high of $3.78 per square foot even with this new construction. The growth in the Central Ohio industrial sector is expected to slow somewhat in the early stages of this year as more inventory is delivered ahead of demand. The market should also see more modest rental rate increases than in previous years.

Avison Young says that the IndiAmong the significant drivers is the market’s central location. Indianapolis has an extensive transportation and logistics network, allowing access to 75 percent of the U.S. and Canadian populations within a 12-hour drive.

Several of the new speculative projects currently under construction include mid-size to large modern distribution centers. One examples is a mas

“ Avison Young predicts that this new speculative construction will spread into secondary submarkets and into outer communities in the Minneapolis-St. Paul metropolitan area.”

anapolis industrial market should remain strong in 2020, too. This market saw more than 10 million square feet of new industrial inventory added during 2019 and net absorption of 10.8 million square feet, a record for this Central Indiana market. More than 95 percent of that space was absorbed quickly, leaving the market with a fourth quarter 2019 vacancy of 4.2 percent. ter-planned park called Whiteland Exchange being developed by Jones Development in Whiteland, Indiana, in the South submarket. The masterplanned park is located along the I-65 corridor and slated to include 2.4 million square feet of space.

Avison Young projections for 2020 include increasing rental growth, construction, leasing and investment vol

ume and decreasing vacancy, all positive signs for this Midwest market.

Avison Young's report said, too, that the speculative construction of bulk distribution centers is expected to slow in St. Louis in 2020. There is currently 5.4 million square feet of industrial space under construction, an 11.6 percent increase from 2018. Vacancy has increased to 8.4 percent and asking rents have decreased from $4.90 to $4.66 per square foot, a 5.1 percent decline.

Medical marijuana became legal in St. Louis in April of 2019 and licenses will be awarded this year. Those applying for licenses were required to secure a property before submitting their application, which has resulted in a temporary shortage of industrial space between 30,000 square feet and 60,000 square feet. Those awarded licenses will occupy their properties and the remaining spaces will come back on the market. Asking rents for those properties may decrease initially, Avison Young said.

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have offered concessions. Some new projects are offering leasing specials to ensure absorption projections are met. The metro’s vacancy rate is hovering around the high 2s to 3 percent – among the lowest in the U.S.

Coming out of the cycle, the Twin Cities has remained “one of the lowest vacancy rate markets in the entire country and that has been for several years running,” Talberg says. “We often get the question are we building too many apartments? My answer to that is always we haven’t built nearly enough apartment units to keep on pace with some other secondary markets and some other major MSAs across the country.”

Talberg says when considering the low vacancy rate as a supporting indicator, the Twin Cities has been and remains a very supply-constrained market.

“In fact, it’s economically a difficult market to build in, just with some of the regulations and now we have some inclusionary zoning polices that are taking effect,” Talberg notes. “In a market where labor costs and construction costs are increasing, economically, it’s making it more difficult to deliver new supply.”

Under new inclusionary zoning policies being adopted, developers must assure that some units in their developments are affordable for lower-income renters.

What’s driving demand for apartments? Mullins says several factors are behind the multifamily boom including pent-up demand from the Great Recession when households lost homes to foreclosure and moved into rental units. “That kicked it off,” Mullins points out. “We’ve also had no production basically for the last decade. No one was building apartments.”

At the same time, multifamily was one of the preferred asset classes that lenders were willing to provide financing for, so that helped stimulate the market.

“And then demographically, you’ve had the barbell effect, which is the boomers and the millennials,” Mullins says. “Demand is driven by these two large demographic groups that are peaking at the same time.”

Downsizing empty-nesters are selling single-family homes and moving into rental housing. The 55-plus housing market is thriving as more baby boomers look to invest in a new home to live out their retirement.

Meanwhile, millennials are flocking to Minneapolis, according to a report by Smart Asset. Minneapolis came in fourth on the list of cities that millennials are moving to. Other drivers include a strong economy, new job creation, a low unemployment rate and wage growth.

People’s confidence is up, Mullins says. “People feel good and are spending money and more apt to form new households,” he notes.

Also, there’s a lack of supply in the for-sale housing sector.

Is a slowdown inevitable?

“There’s no question that we’re at the peak,” Mullins says. “I think things may cool off a little bit next year, but we’re not going to see a bust by any means. “The question I get asked all of the time is where are we in the cycle?” Mullins continues. “What inning are we in? We’re in extra innings. We’ve been in extra innings now for a long time. In theory, we should have already peaked and there should have been a slowdown.”

However, the Twin Cities’ rent growth and vacancy rates remain strong. “If you have a sub-5 percent vacancy rate, that still suggests there’s room in the marketplace,” Mullins says. “As long as units are being absorbed, you’re going to keep seeing more and more new product. We still feel pretty good about the market. Sooner or later, we’re going to see some correction to some extent... We’re due in theory.”

Market sees insatiable investor appetite The Twin Cities continues to attract national interest and out-of-town investors pursuing apartment deals that have healthier returns than other major markets.

“There’s no question that there are a lot of dollars chasing apartments,” Mullins notes. “You have a lot of outside capital chasing deals today… and they’re paying top dollar for the assets.” In addition to newer product, investors are also still seeking value-add deals.

“It’s a market that checks a lot of the boxes from an institutional capital’s perspective on where they want to place capital, and that has been the reason why we’ve seen a lot of new buyers coming into the market,” Talberg says. “There are a lot of new investors and new lenders, and we expect that trend only to continue.”

Talberg says many investors consider Minneapolis like a Denver or Austin, Texas, in that it’s a core secondary market.

Also, some believe that the Twin Cities is perhaps at a later stage of the economic cycle and a good market to place their money from a long-term hold perspective.

“We’ve been trending over the past few years around $2 billion in sales vol

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