The cities versus suburbs debate has long been driving multifamily players’ investment decisions. The pandemic seems to have settled the debate in favor of the suburbs for now, as it prompted residents to leave the urban core.
Nonetheless, for downsizing Baby Boomers and for Millennials looking to put down roots, the suburban lifestyle was becoming increasingly attractive even before the health crisis, according to Ryan Sailer, vice president of real estate development at Timberland Partners.
The idea of outmigration from the urban centers was Timberland’s thesis behind creating the Sundance Living platform, a concept designed with suburban renters in mind. To find out more about the platform and how the concept fits into the metro’s multifamily market, Multi-Housing News asked Sailer to dive into details and provide a comprehensive picture of the Twin Cities multifamily landscape.
How much has the Twin Cities multifamily market changed over the past 12 months?
Sailer: I don’t think the appetite for multifamily development has really diminished at all over the past 12 months. Early in the pandemic, some development projects were put on hold either because developers wanted to see how the effects of the pandemic would play out, or because equity became temporarily unavailable or unattractive at the terms in which it was being offered.
As we moved into the summer, social unrest also created some uncertainty. And throughout the entire year, we’ve been battling continually rising lumber and material prices, along with delays in receiving the materials. So, there have been a lot of forces at play over the last 12 months on the supply side. From an acquisition standpoint, there was maybe a 30-to-60-day slowdown, but cap rates remained low and the market remained strong.
On the demand side, you saw declining rents in the core and some softness around the core. Suburban rents—although we really didn’t see any year-over-year increases—held up pretty well, as did leasing velocity. From a rent collection and lease-up perspective, I think Class A lease-ups definitely slowed down, but rent collections remained stronger in the Class A space vs. Class B and C.
Overall, I think those of us who lived through the Great Recession understood that what happened in 2020 wasn’t caused by an economic bubble, it was caused by a health crisis, and that the demand would be there after the pandemic subsides.
Buying existing apartments and starting construction on new developments toward the end of the Great Recession turned out to be a great move for those willing to take the risk and I think the same holds true now. Projects that started in 2020 or will start in 2021, given the duration of how long a project takes to build, will be well positioned when they open later this year or next.
To what extent has the pandemic affected your plans and operations? Has your business strategy changed since the onset of the pandemic?
Sailer: On the development side of our business, the pandemic really gave us an opportunity to reevaluate our priorities and strategy. Before the pandemic, we were looking at a lot of different projects, more urban infill midrise type projects. The pandemic gave us an opportunity to pull back and really decide where we wanted to put our focus.
Since about 2018, we’ve also been working on our Sundance Living platform, which is a two-story suburban product. We saw the trend of Millennials moving to the suburbs, looking to put down roots, and knew that long term this was a space in which there was a great opportunity. So, the pandemic wasn’t the catalyst for us changing strategies, but it did drive us to become almost exclusively focused on the Sundance Living platform.
On the acquisition side of our business, the decision was made early in the pandemic to keep acquiring existing apartment assets. We were able to capitalize on some good opportunities. Some buyers decided to sit on the sidelines, which allowed us to acquire some communities without the competition we usually see. We were also able to acquire some recently completed developments still in lease-up at attractive prices because we were willing to take on the lease-up risk. Those opportunities have worked out well for us up to this point.
You recently opened Sundance Woodbury, a townhome-style apartment in a first-ring suburb of Twin Cities. Did the health crisis affect the development process of this property?
Sailer: We were a few months into construction when the pandemic really started to shut everything down. Thankfully, in Minnesota, construction sites were not shut down. Our general contractor, Frana Cos., did a great job adopting pandemic-related health and safety protocols, so we really didn’t see any construction delays related to the pandemic.
The Sundance product type is designed so that each unit has its own direct access entry, with no common areas within the buildings themselves. This type of living option in a suburban setting was very attractive to prospective residents during a time of social distancing and the still many unknowns regarding the spread of COVID-19. It has been well received and lease-up is far ahead of expectations.
Were there any other challenges you encountered during the development of Sundance Woodbury?
Sailer: One challenge was learning how to adapt to virtual meetings early on. During active construction, it’s ideal to have the entire team on-site at the same time to review progress and discuss any changes that need to be made in the field. In the early days of COVID-19, this wasn’t possible, so everyone had to adapt to a new way of doing things, including virtual meetings and staggering site visits so everyone wasn’t on-site at the same time.
Leasing was also a challenge as, for a while, all leasing and property tours were done virtually. Thankfully, Timberland self-manages our portfolio of over 18,000 units and we have a great team that was able to adapt quickly and put a plan in place so that we were still able to connect with prospective residents effectively and not only meet but exceed our leasing projections.
But probably the biggest pandemic-related challenge has been dealing with the continued price increases and delays associated with construction materials. It has affected everything, from lumber and appliances to furniture, fixtures and equipment. Although it’s eating into everyone’s profit margins, we’re still thankfully within budget and on schedule, but every day is an ongoing battle to keep things on track.
How does the Sundance concept appeal to Millennials and empty nesters?
Sailer: The Sundance concept involves two-story units, but all the units are really flats, so there is one unit up and one unit down. Every unit in Woodbury has its own direct unit access and attached garage. The units themselves are also larger than maybe you’d see in a traditional midrise building.
The main level units have been very attractive to empty nesters who don’t want to climb stairs. Many of these residents are also downsizing, so the larger units and garages give them a little extra room for their “stuff.”
As for Millennials, most of them are now in their mid-to-upper 30s. Many have lived in apartments downtown or closer to the core, which is great when you’re younger, but many are now more focused on their careers, starting a family and putting down roots in a community. However, many still can’t afford or don’t want to own a home yet for various reasons.
Sundance is a happy medium between an apartment and a single-family home that is very appealing to this demographic. Creating a sense of community within a Sundance community will be crucial, not just in Woodbury, but in all future Sundance locations, as well. We really want our residents to feel like they are part of something bigger in a way that will connect them to their immediate neighbors and within the larger community.
However, perhaps one of the biggest attractions of Woodbury, and for all Sundance locations going forward, will be the location. We’re really trying to focus on growing communities with a strong job base and job growth, great access to services and locations within good school districts.
The COVID-19 crisis has prompted residents to favor suburban areas. To what extent has this trend impacted Twin Cities?
Sailer: It’s been a trend in Twin Cities, as well, although I don’t think out-migration from the core has been as drastic as maybe many people thought it would be. I also think that after the pandemic, once restaurants and entertainment venues are open again, you will see people return to the core and our downtowns get healthy again—but it will definitely take some time.
Looking ahead, what are some of the determining factors that will shape the multifamily market in Twin Cities?
Sailer: From a demand perspective, I think first and foremost, it always comes down to job growth. Historically, Twin Cities has always had pretty strong job growth, coupled with low unemployment, which attracts people to the area and creates demand for apartments. Unemployment is below 5 percent again. If job growth continues to pick up and unemployment keeps trending lower, demand should remain strong.
From a supply perspective, there are a myriad factors that could affect the supply of new products, including rising construction prices and, at some point in the future, rising interest rates. City politics will also be something to monitor as many have either implemented or are considering inclusionary housing ordinances, while some cities, such as Minneapolis, are contemplating rent controls. Depending on how that plays out, it could drastically affect development patterns, and, to some extent, supply.
Investment capital continues to be attracted to Twin Cities and cap rates remain very low, so I think it will continue to be a seller’s market with strong demand for new and existing products from buyers. Rent growth should also start trending upward again sometime in 2021. All in all, the Twin Cities multifamily market has held up very well through the pandemic, and, barring the unforeseen, should remain a solid market going forward.