Twin City Multifamily on a Roll

By Dees Stribling, Contributing Editor

Minneapolis—Apartment rents in the Twin Cities have reached record highs, according to the latest report on the market by investment specialist Marcus & Millichap. But the high-rent party for landlords might not last too many years, since apartment construction has heated up, resulting in an extra-full pipeline for the area.

Still, tight occupancies this year will allow operators to record the highest annual asking rent increase since 2008, as asking and effective rents will advance 3.1 percent to $988 per month and $934 per month, respectively, the report says. A lot of people in the Twin Cities are still reluctant to buy—or are still shut out of the housing market—and 2012 has seen job growth in the area as well, boosting the demand for apartments. Led by strong growth in the education and health services sector, the local economy will create a net of 28,000 jobs this year, 1.6 percent more than last year, with gains across most employment sectors.

But these trends don’t mean that multifamily developers are coasting along, skimping on amenities at their properties and relying on demand to lease them up. “Many renters in the market are young professionals beginning to establish careers and, before the housing market collapse, would have been looking to purchase condos,” the reported noted. “Accustomed to comforts, these tenants have much higher housing expectations and are seeking accommodations with added services and amenities.

“As a result, new apartment developments are adding higher-end finishes and features such as a concierge service, pub or cafe, outdoor gathering space, roof-top decks, dog runs and pet-care areas,” the Marcus & Millichap report continues. “In the process, builders have established a new rent ceiling and redefined the Class A segment. As new high-end projects are injected into the market, owners with existing top-tier properties could be at a disadvantage and will need to expand concessions to maintain occupancy levels.”

Indeed, Class A supply will spike by 1,865 units in 2012, a 1.2 percent increase. This will put upward pressure on vacancy in the city of Minneapolis in particular, where half of the new inventory will be located. Last year, only 477 rentals were completed in the entire metro area. That will just be the beginning, barring a major economic catastrophe: in total, some 2,450 apartment units are under construction with completions scheduled through 2013, and more than 9,300 units are on the drawing boards.