Mixed-Use and Apartments: Is There Still Room for Growth in the Twin Cities?
As a team, we work heavily in mixed-use leasing and development sourcing. Our team handles the commercial leasing on many mixed-use projects within the Twin Cities market, where we also source and find locations for mixed-use apartment developers. This article will give a current snapshot of the mixed-use retail and apartment market within the Twin Cities.
What types of projects?
There are many three- to six-story, podium-style apartment buildings popping up all over the urban areas of Minneapolis-St. Paul. This product type can also be found in the suburbs. The first floor, or the podium, is constructed out of concrete and allows for up to five additional floors. This is very prevalent in our market and we don’t see this changing soon. However, advanced timber construction is just starting to show itself in the Twin Cities.
The mid-rise and high-rise multifamily buildings are mostly contained to the urban core areas. These projects are all concrete construction. It took up until the last five years or so to see major grocers occupy the first floor. We have observed many examples of this and have worked with some of the large nationals as well as larger, local grocers.
Mixed-use does not appear to be going away anytime soon. Cities are all pushing for neighborhood retail — both the city administrators and the neighborhood groups. It is kind of “back to the future” with service retail being very walkable — like the old days with storefronts below housing.
About 10 years ago, there were no developers willing to do micro-unit apartments in the Twin Cities. The costs per unit were prohibitive with no sense of real demand.
Now there are several development companies building this type of product as the demand has sparked. The rent per square foot for micro units are high enough for the developers to make sense of the costs incurred. This is important because many renters do not think in terms of cost per square foot, but more on an aggregate total as they compare options. With this, renters appear to be willing to forgo more livable space in return for access to highly desirable locations in amenity-rich buildings. The residents can afford the relatively low overall monthly rent due to the small square footage of the units (500 square feet and under).
Is there still demand?
Many people wonder when the demand for new apartments will finally slow or stop. In the Twin Cities, we see vacancy rates, rental rate increases and demographics all still favorable for continued development.
Minneapolis-St. Paul continues to be one of the top-performing apartment markets in the country. Net absorption is expected to surpass deliveries, lowering vacancy to 2.9 percent at the end of 2019, according to Marcus & Millichap. Last year, annual vacancy held steady at 3 percent.
Year-over-year rent growth is tracking at about 4.1 percent so far in 2019. Business growth, hiring and in-migration are all supporting strong renter demand, while the challenged inventory of available for-sale homes is creating delays in renters transitioning to starter homes.
In addition to millennials as the main renters of new projects, we see anecdotally a growing number of Baby Boomers who have simplified their lives, but still want to have fun. We have heard from higher-end, market-rate apartment managers that about 30 percent of renters in their buildings are Baby Boomers.
“At our firm, we are always closely analyzing unit mix with our new apartment projects. Albeit we are adding smaller, micro-style units based on current demand; we are also adding larger units. The addition of larger units are due to the lack of supply,” says Chris Sherman, senior vice president of operations and capital markets at Sherman Associates Inc.
“Although there may be some higher vacancy and lower rents per square foot occurring in the downtown core regarding standard two-bedroom units, we are confident in their long-term performance. Penthouse-style units are pricing about 20 to 30 percent higher,” says Sherman.
There will probably be another 5,000 apartment units in total completed in 2019 with another 3,000 to follow in 2020. We have been hearing about a potential slowing of development in Minneapolis proper due to inclusionary zoning coming soon, which has already affected some of our negotiations on an assemblage of residential lots in the highly desirable northeast Minneapolis market. This new law will require a certain percentage of affordable units be included on all new housing. Smaller units, including micro units, are becoming a larger and larger percentage of new multifamily developments.
We see that mixed-use projects will continue in popularity with cities, neighborhoods and renters. Suburban communities have also taken notice as they look to change the way their cities view future developments and ways to create or enhance a “downtown” district. The challenges with parking and exposure continue to be an inherent headwind when it comes to working with retailers going into mixed-use environments.
However, having commercial tenants that are a true amenity on the first floor of projects will add to the per square foot rental rates achieved in the housing portion of the buildings. Renters are willing to pay more for their apartments if there is something in the building that creates a better environment and that they can call their own.
— By Rob Kost, Director of Commercial Services, and Blake Martin, Associate Vice President, Upland Real Estate Group Inc. This article originally appeared in the September 2019 issue of Heartland Real Estate Business magazine.