MARKET SNAPSHOT: Minneapolis Growth Expands to Suburbs

Minneapolis—The economy of the Twin Cities remains diverse and stable, reports Solomon Poretsky, regional manager in Marcus & Millichap’s Bloomington, Minn. office.

“You have stable companies here. …  We have a combination of a highly productive and educated labor force and solid businesses that need to employ people,” he tells MHN. “Our hope is we’ll add 21,000 workers this year for the metro.”

The most recent Minneapolis-St. Paul-Bloomington unemployment rate was 6.9 percent, according to the Bureau of Labor Statistics.

“As rural and exurban people urbanize and suburbanize, Minneapolis is really the second regional center after Chicago,” Poretsky notes.

Average vacancy market-wide is projected to drop 110 bps this year, to 2.7 percent, according to Marcus & Millichap’s most recent report. Class A vacancy is at 3.2 percent, while Class B/C vacancy is 2.6 percent.

While most of the building in the metro over the last few years has been urban infill, Poretsky observes a trend toward some suburban development. In the corporate suburb of Bloomington, for example, 500 units are about to break ground. “Over the last couple of years the growth had been concentrated in Minneapolis proper; we are seeing that growth expanding now to the suburbs and St. Paul,” he says.

Approximately 600 units are slated to come online this year. About 1,250 units are underway in the metro, with the planning pipeline comprised of more than 1,800 apartments for the metro, according to the report.

Also according to the report, as occupancy continues to rise, Class A asking rents could reach historical highs, thus pushing more renters down the quality scale in the second half of the year and reducing Class B and C vacancies.

By the end of the year, market-wide asking and effective rents are projected to increase 2.7 percent and 3.4 percent, respectively.

In the past year, sales activity increased more than 40 percent, with discounted properties dragging down the median price 6 percent year-over-year, to $51,800 per unit. Top-tier properties, however, are trading at an average of $100,000 per unit.

Average cap rates are currently in the low-8 percent range, with lower-tier properties achieving 10 percent cap rates, while top-tier assets are trading in the mid-5 to low-6 percent range.

“Minneapolis generally tracks the U.S., except our highs aren’t as high and our lows aren’t as low,” points out Poretsky, who asserts that the market will remain strong given its relatively high land costs—for a Midwestern market—and relatively low rents.

“The most expensive submarket is the city proper, and the effective rent level is $1,000 per month,” he tells MHN. “There are not a lot of desirable places to live where the most expensive area is $1,000 a month,” he points out.