The Twin Cities: An Unlikely Shelter in Turbulent Multifamily Markets
The Minneapolis metropolitan area made plenty of headlines in 2020, and much of the news wasn’t good. The social fabric was frayed, and property damage estimated at between $250 million and $500 million ensued.
On the surface, the Twin Cities appear unlikely sources of stability and relative safety for multifamily investors, and yet market performance and property value trends have so far proven resilient in the face of adversity. In comparison to many of the primary markets and its regional rival, Chicago, Minneapolis has navigated the effects of the pandemic recession remarkably well and may represent an attractive option for investors who remain committed to the urban mid-rise model, as well as those considering increased exposure to suburban situations.
The Minneapolis economy was by no means immune to the effects of public health-related lockdowns. Payroll employment plunged by 270,000 jobs in March and April, representing about 13.3 percent of the February metro total. Although severe, pandemic losses fell below the national average (U.S. payrolls fell 14.6 percent) and were comparable to those recorded in Chicago and Milwaukee.
Since April, the Minneapolis labor market has made considerable headway. The unemployment rate dropped to 7.9 percent in August, materially lower than the 11.7 and 10.2 percent rates recorded in Chicago and Detroit and comparable to levels observed in smaller Midwest and West Coast technology hubs. With respect to payroll employment, about 43 percent of job losses recorded in March and April were recovered by August, lagging the national average but comparing favorably to most U.S. primary markets.
Throughout this volatile period the Minneapolis – Saint Paul (MSP) multifamily performance was steadfast. A 154,000-unit stabilized, same-store sample surveyed by Yardi experienced only a 23-basis point occupancy rate decrease from February to June, remaining on 96 percent or higher throughout the first four months of pandemic. Net absorption returned to positive territory in July, and average occupancy recovered 5 basis points from June to 96.05 percent in September, among the highest rates in the country.
Urban submarkets, which were under supply pressure before the pandemic, underperformed the metro average, but occupancy losses were moderate under the circumstances. Average occupancy in urban Minneapolis fell 89 basis points between February and September, identical to the supply-related decline recorded over the previous seven-month period. At the same time, lease-up at new urban properties remained positive; indeed, comparing favorably to 2018 levels. Moreover, urban tenant losses were concentrated in the University submarket, where occupancy plunged 112 basis points between February and September due more to introduction of distance learning at the University of Minnesota than a shift in renter preference from urban living.
Rent trends also were firm. Average metro rent in September was 1.84 percent higher than the year-earlier month and up 0.96 percent since February. Again, the gains were mostly attributable to suburban submarkets – average September rent in properties located beyond the Minneapolis pale were 2.01 percent higher year on year and up 1.09 percent from February – but urban properties held their own, rising 0.62 percent from September 2019 and 0.12 percent from February.
Although investors may find more to like in suburban garden apartments these days, the performance of recent-construction urban mid- and high-rise buildings was nothing to sneer at. Occupancy of 53 stabilized elevator buildings constructed since 2010 averaged 94.14 percent in September, representing a 49 basis points decline since February, a smaller decrease and higher average than the urban submarket norm. Although segment rent trends were slightly negative between February and September (-0.18 percent), asset class rent performance was stronger than in most U.S. urban markets.
Institutional investors are taking notice. In July, a Los Angeles-based global capital manager acquired a Maple Grove single-family style property at a 4.48 percent underwritten yield; and in August, a New York-based fund manager acquired a Class B+ Washington County garden complex priced to a high-4 percent initial yield. More recently, a pair of contemporary mid-rise assets were purchased by out-of-state buyers, including a stabilized 2019-vintage St. Paul property priced to a low-4 percent in place cap rate, consistent with and perhaps below pre-pandemic levels.
During the early stages of the recovery multifamily investors will probably expand their lists of target geographies to include a few secondary markets that may provide performance stability under what are likely to be volatile conditions and evolving renter preferences. Currently, a great deal of attention is being paid to the Carolinas, and for good reason; but the Twin Cities offer similar demographics and property-type options, and prospective acquirers may find there a bit less bid competition than they would encounter in Raleigh.
— By Daniel J. Hogan, Lument (formerly, ORIX Real Estate Capital) Managing Director for Research. Lument is a content partner of REBusinessOnline. The views expressed herein are those of the author and do not necessarily reflect the views of Lument or of the author’s colleagues at Lument.
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