MARKET SNAPSHOT: Construction Soars in Minneapolis as Employment and Occupancy Keep Pressure on Rents

By Philip Shea, Associate Editor

Source: Marcus & Millichap

The Twin Cities MSA is continuing to see exceptionally low vacancies, as strong employment growth and renter demand squeezes the supply of existing inventory. As a result of this, developers are expected to ramp up activity and deliver 2,800 units to the market by the end of the year—the highest rate of completion in over 20 years.

Marcus & Millichap notes that over 75,000 jobs have been added the metro since 2010, while another 49,300 are expected to be generated this year alone. A significant number of these positions will come from the health services sector, with the Mayo Clinic and Allina Health System remaining two of the largest employers in the state of Minnesota.

In sum, the Twin Cities posted one of the lowest overall vacancy rates in the country in the fourth quarter of 2012—at 2.5 percent. This remarkably low figure, virtually unseen outside the “Sexy Six” markets, has been enough to push asking rents to record levels, with the 2013 average expected to rise 4.5 percent to $1,035 per month. Effective rents will rise even more—from $955 per month in 2012 to $1,001 per month in 2013.

The wave of construction expected to alleviate such—at least from a renter’s perspective—will come in the form of Class A units delivered to core urban submarkets, and fierce competition for this product will likely force many buyers to seek Class B properties located near major employment centers, such as Eden Prairie and Plymouth.

Source: Marcus & Millichap

Marcus & Millichap notes that the metro will see the first condo project delivered since the onset of the recession, and that 2,000 of the new rental units will be delivered to the downtown Minneapolis area, which currently has numerous high-rise projects under construction.

While vacancy is expected to tick up slightly to 2.8 percent by year’s end, the Twin Cities will remain a Top 10 market in 2013, moving up three places to the number-seven spot in Marcus & Millichap’s National Apartment Index (NAI).