MARKET SNAPSHOT: Strong Employment Growth, and Demand, in Twin Cities to Outpace Apartment Supply

Minneapolis—While the Twin Cities is expected to add approximately 25,000 new jobs this year, only about 500 units are projected to be delivered to the market.

“Typical job growth for us is 15,000 jobs a year, so construction is significantly below our demand,” says Solomon Poretsky, regional manager of Marcus & Millichap’s Bloomington, Minn. office.

The Minneapolis-St. Paul-Bloomington unemployment rate has held steady at 6.5 percent since October 2010, according to the Bureau of Labor Statistics, which can be attributed to the relatively diverse economy that is exposed to food and healthcare, as well as government and education.

“We built 330 [units] last year; we think we’ll build 500 [units this year],” Poretsky says.

“We haven’t built enough apartment units in years; whereas there is oversupply in other parts of the country, the cost of building here, coupled with the relatively low rents per-square-foot, has held apartment construction down,” Poretsky tells MHN.

“Outside of very, very high Class A or tax credit0type deals, it’s very hard to build a bread-and-butter apartment in the Twin Cities, because the rents are too low to support it,” he adds.

This lack of new supply has kept occupancy high; in fact, market-wide vacancy is projected to be only 3.6 percent this year, according to Marcus & Millichap’s latest report.

And while the urban infill areas are the most desirable, Poretsky adds that no submarket is below 94 percent occupancy. Unit-wise, however, there is some difference; while larger two- and three-bedroom units are still seeing some impact from the shadow market.

“We are projecting rents will grow just a little ahead of inflation,” says Poretsky, adding that concessions have come down from one-month of free rent. As the industry heads into prime leasing season, many owners won’t even be offering concessions, which, he adds, is “a real change from what we’ve seen in the last few years.”

According to Marcus & Millichap’s report, asking and effective rents will increase 3.1 percent and 3.9 percent, respectively.

In terms of the investment market, the first three quarters of 2010 were actually down, velocity-wise, from 2009. “We went into the downturn well after most of the rest of the country,” points out Poretsky, “but we’ve starting to seeing inklings of increased seller interest.”

Assets are trading in the low- to mid-8 percent cap rate range for sub 50-unit buildings, though Poretsky observes that those buildings in the most desirable areas are trading in the 7 percent range this year.