Before COVID-19 hit, the Minneapolis/St. Paul multifamily market was thriving. And today? It’s doing the same. Even as the Twin Cities and the rest of the country continue battling the pandemic, developers are building new multifamily properties, investors are sinking their dollars into apartments and renters are buying up units at newly built buildings.
What’s behind the strength of the Minneapolis/St. Paul multifamily market? We recently spoke with Matthew Mullins, vice president at Maxfield Research & Consulting in Roseville, Minnesota. He said that he expects the multifamily hot streak here to continue. And he sees a strong rest of the year and early 2022 for this sector.
How strong is the multifamily market in the Twin Cities area today?
Matthew Mullins: The market has changed quite a bit in the past six months. I put together an annual and bi-annual update on what has happened in the marketplace, looking at rents, vacancies and absorption. Back in December and January, when we were putting our year-end efforts together, it was quite a different market from where we are now. Vaccinations weren’t rolled out yet. A lot of stimulus money was still being distributed. Things were still closed.
Then spring kicked in. Some of the restrictions eased. Vaccinations rolled out. The market started to pick up month to month. By the time we hit May and our governor lifted most of the restrictions, that lit the market on fire as the economy ramped up. Demand for multifamily increased substantially. The sector has been really hot since.
Have you seen signs that the multifamily market’s hot streak will continue?
Mullins: If you just look at concessions, you can see it. Back in the winter months, most of the new projects were offering concessions. They might offer one or two months of free rent, especially in the downtown core product. Once we got into the spring months, those concessions started to wane. Renters were getting phenomenal deals six months ago. Today, it’s a different market. There are still concessions in certain markets, mostly downtown core markets. But the suburban markets have backed off on concessions. It’s interesting to see how fast the market turned. It’s been fascinating.
How about rent growth? Are building owners charging higher rents today?
Mullins: Rent growth has been pretty nominal. We’ve had pretty nominal rent growth compared to a lot of metro areas across the country. All those booming markets in the south, Texas, Phoenix and Florida, are seeing massive, massive rent growth. We are still hovering at the rate of inflation here in the Twin Cities. Compared to other markets across the country, our rent growth is low. We are a low-rent-growth market.
How much new apartment construction are you seeing in the Twin Cities area?
Mullins: We had record new supply in 2020. We hit the highest peak we have ever seen with just more than 10,000 units delivered last year. And that’s a pretty big peak. In prior years, we peaked in the 7,000-unit range. We had a 30 percent increase in new deliveries in 2020 during the pandemic. That’s impressive. We also had a huge year for deliveries in Minneapolis. I have Minneapolis proper at 4,400 new apartments units in 2020. Compare that to the whole metro area, and roughly 44 percent of all new apartment unit deliveries were in Minneapolis.
With COVID-19, has there been any slowdown in the number of people who want to rent in downtown Minneapolis and its surrounding neighborhoods?
Mullins: The center of Minneapolis got hit hard during the pandemic. But we are seeing things coming back, slowly. It’s taking a lot longer for product in the urban core to fill up than it is for the suburban product. People moved out to the burbs and exurbs to get more space during COVID. That hurt the core.
At the same time, a lot of the multifamily product built in Minneapolis has been studios. When the pandemic hit, though, no one wanted to live in a studio apartment. Studio apartments now have the highest vacancy rate across the board. The amenities in these buildings were closed. The gyms and activity rooms were closed. So why would people want to live in a studio apartment in downtown during the height of the pandemic?
This was a big flip-flop from prior to the pandemic. Before the pandemic, two- to three-bedroom units were tougher to lease. They were considered too expensive. Then the pandemic hits, and everyone wants two bedrooms. Two-bedroom units are now a hot commodity.
What other trends are you seeing with new apartment development?
Mullins: There has been a shift to bigger units. And if a building is offering smaller units, they’re still offering more flex space in those units. They might have a niche for a home office or a space for a workout area. You are seeing architects draw up new plans that are more creative as people spend more time at home. These spaces are more versatile and serve more purposes. The work-from-home model, the hybrid model, we think is going to stick around. We think we’re going to see more people going into the office two or three days a week and working from home the other days. It’s important, then, that these buildings offer the amenities and common-area amenities that allow people to work from home.
The common areas in these buildings have more flex and working spaces built into them, too. We are seeing more dollars being spent on spaces that allow people to bring in their laptops or have a space where they can work outside their units. More of that is happening today.
How has the rise of the Delta variant changed the multifamily market? Is there fear that new mask mandates might slow growth in the Twin Cities apartment market?
Mullins: There is a lot of uncertainty right now. Masks are coming back. School districts are waiting to see what they should do. Parents are on the fence about in-person schooling right now. There is a lot of apprehension out there. Because of Delta, a lot of major corporations are pushing back their return-to-work dates, especially in the downtown core. Target announced that they are not bringing their employees back to the office until 2022. Some of the banks are now looking at October or November. There are so many unknowns. This will affect the CBD the most when it comes to multifamily. Will it affect the suburban areas? I think the suburban areas will be fine. We’ll be seeing most of the impact in the urban core.
What does the future hold, then, for multifamily in the Twin Cities?
Mullins: We have seen a lot of construction delays, projects that did not deliver as quickly as anticipated because of materials shortages. Because of this, we are showing 2021 as being another blockbuster year for new construction. We think it will surpass 2020. I am still tinkering with the numbers. I’m verifying a few more buildings. But through Aug. 1, we have delivered about 4,500 apartment units in the market. However, the back end of the year is where the boom in construction will take place. Typically, apartment projects want to open in the spring or summer. But because of delays back in the fall months, there is now a ton of product opening in the fall and the rest of the year. As of right now, we are showing another 7,000 units that will be delivered in 2021, through the next three-and-a-half months. That is a lot of supply coming up.
