MARKET REPORT: Moderately Priced Apartments in Minneapolis Continue to Perform Well

Minneapolis—While some major metro areas see better performances among higher asset classes, the Twin Cities is experiencing quite the opposite.

The higher the asset class here, the worse it is performing, according to Paul Sween, principal at Dominium Development and Acquisition. The company, which focuses on affordable housing, particularly Section 42, has found that the change in revenue from 2008 to 2009 was up about 4 percent and that it is exceeding expectations thus far this year.

“Shadow markets will tend to compete with higher-end markets, which is probably one of the effects that has led to the situation where our lower-priced apartments have stronger rent growth and higher occupancies,” notes Sween.

Even so, vacancy is only up slightly, with projected fourth quarter numbers at 5.1 percent—down from its high of 6.4 percent in the third quarter of 2009.

While this uptick in vacancy is primarily due to the fact that residents are doubling up, Sween predicts that apartments will flourish as soon as the economy is more stable and employment improves, noting that demographics are certainly in the sector’s factor.

Still, unemployment in the metro is significantly lower than the national average. (According to most recent numbers released by the Bureau of Labor Statistics, the Minneapolis-St. Paul-Bloomington metro saw a 7.2 percent unemployment rate, compared to the U.S. rate of 9.7 percent).

“We are a milder version of the U.S. economy, generally,” Sween tells MHN. “We have a pretty diverse economic base; there are quite a few larger companies in Minneapolis, in terms of Fortune 500 companies (including, for example, Target and Best Buy). The diverse economy has resulted in lower unemployment, which extends to higher occupancy rates.”

In terms of transactions, Sween believes that now is a terrific opportunity to buy. “We are buying and getting wonderful values, so the subjective concern of the investor community is not understandable to me because investment opportunities seem so fantastic,” he notes. “Long-term interest rates are low and cap rates are being pushed higher and higher—it’s just an unprecedented opportunity to buy.”

However, while Sween notes that there is a fair amount of product on the market, buyers aren’t making offers “high enough for the sellers to actually sell.” Because of this, he believes, “the primary market/opportunity is where you have an institution involved. Oftentimes institutions will commit themselves to a disposition strategy and they follow it, so that’s where you see transactions.”

In addition to the institutional opportunities, Sween believes the best markets are in affordable housing. As government policy continues to support the development and renovation of this product type, Sween notes that there are approximately 1,000 units currently in the pipeline for next year.