Josh Talberg sees a bright future for the multifamily sector in the Minneapolis-St. Paul market. That’s largely because developers here didn’t overbuild while the demand from tenants is still high for multifamily space.
Talberg, managing director with the Minneapolis office of JLL, said that this combination is building to what he calls a bright future for the local multifamily market.
“The Twin Cities is set up for a growth story that feels like it is going to have a long and wide runway,” Talberg said.
This is good news for developers hoping to add to the Twin Cities’ undersupplied multifamily housing stock and investors looking for a safe place to park their dollars.
Yes, interest rates are still high enough so that multifamily investment sales are few. And the high costs of borrowing money, not to mention the equally high price of construction materials, makes it difficult to develop new properties today.
But Talberg said that the underlying fundamentals of the apartment sector in Minneapolis-St. Paul remain strong. In the long-term, then, investors should return to this sector and developers will once again add to the supply of new apartment units, both in the urban core of the Twin Cities and its suburbs.
“The demand for well-located and fundamentally sound multifamily assets is strong,” Talberg said. “There is pent-up demand for these properties. The Twin Cities has been and continues to be one of the most supply-constrained multifamily markets in the country. Investors see that. They know that activity in this market is poised to increase.”
A volatile period
Like all apartment markets, the Twin Cities has gone through a volatile period since the start of the COVID-19 pandemic in 2020. That was followed swiftly by rising interest rates. This inevitably led to a slowdown in investment sales activity.
But even during these challenging times, the multifamily market in most of the Midwest, and especially in the Twin Cities, remained stable, Talberg said. The Minneapolis-St. Paul market continued to see apartment rent growth.
But rents never soared like they did in some coastal and southern markets. That more conservative nature has left room for future rent growth in this market, Talberg said.
“There is room for landlords and building owners to grow these rents,” he said. “There is a growing interest in the Twin Cities multifamily market.”
One indication of the strength of and demand for the local apartment market? According to RentCafe’s February Rental Activity Report, Minneapolis remained the most sought-after city for apartment rentals for the third consecutive month.
RentCafe’s demand report is based on the number of online views that apartment listings attract, the number of apartment units that site visitors save as favorites and the number of saved personalized searches for each of the 150 largest cities in the United States.
In February, Minneapolis once again earned the title of the most coveted city among renters browsing RentCafe.com in search of apartments.
Views for apartments in Minneapolis soared by 234% in February of this year compared to the same month one year earlier, according to RentCafe. This surge in online engagement is reflected in a 22% year-over-year decrease in available apartment listings on RentCafe.com compared to one year prior, which helped propel the city to the top of the company’s list.
“That pent-up demand from investors looking for commercial real estate is starting to ease in Midwest markets, specifically the Twin Cities,” Talberg said. “Our market is attractive to investors. Some of these investors are looking at the Twin Cities market for the first time. They are ready to start making long-term bets again. They are looking for a stable region like the Twin Cities.”
More development on the way?
Will tenants seeking apartment units have more choices soon? Maybe. It largely depends on whether the challenges of building new construction today are outweighed by the rising demand among renters for multifamily space.
As Talberg says, the Minneapolis-St. Paul market does not have nearly enough apartment units to meet the demand for them. That would indicate that developers will be adding more supply to the mix.
At the same time, though, high interest rates and material costs make it difficult to pencil in new projects today, Talberg said.
The challenges of building new have resulted in a slowdown in permit activity in 2024, and Talberg says that he expects a similar slowdown in 2025. This is despite numbers showing that the Twin Cities market needs about 49,000 new apartment units to meet demand.
During the next 12 to 36 months, apartment construction that began before the current slowdown will be coming online in the local market. The real impact of the lack of new apartment development will be felt in 2025, 2026 and 2027, Talberg said.
One solution to bring new apartment units to the market despite the rising costs of new development? Talberg points to financial help from the state and municipal governments.
“If you find a project with a TIF, grants or favorable land pricing, that can help move that project from concept to actual construction,” Talberg said. “Without that help from the city or state, though, it remains very difficult to build anything new. The pipeline of new apartment construction will remain minimal for the next several months. That does set the stage for a very appealing growth story in the Twin Cities when it comes to rents.”
Where is demand for new apartment units highest? Talberg said that the local market saw a push to the suburbs during the early to middle stages of the pandemic. Now, though, the Minneapolis-St. Paul market is seeing a return to the urban core.
“As rents have been flatter in the urban core versus the costs of ownership and renting in the suburbs, we expect more people to return to the urban areas,” Talberg said. “As employees continue their back-to-the-office mandates, that, too, will bring more renters back to the urban core. There are specific pockets in the market that are more vibrant today than they were pre-COVID. They are a lot further along than people looking in from the outside would expect.
“There is absolutely a comeback story that is playing out in the urban core,” Talberg said. “We expect that will continue and only gain momentum.”
Talberg said that the suburban markets that are seeing the most demand for multifamily units are those that boast good school districts and walkable downtown areas. He pointed to communities such as Edina, Eden Prairie and parts of St. Louis Park.
With home values rising and mortgage interest rates high, that puts the cost of owning a home in the suburbs out of reach for more people, Talberg said. That has only amplified the demand for well-located apartment communities throughout the suburbs.
Urban areas that are seeing high demand for multifamily spaces include neighborhoods such as the North Loop, Mill District and anything located along the riverfront, Talberg said.
“There is growth and vibrancy throughout the downtown area,” he said. “Even St. Paul’s downtown has seen a nice rebound. Look at St. Paul: The pipeline for new apartment construction is practically zero right now. As we go forward, that is a set-up for the rent growth that will we see taking place there.”
Apartment rent growth has already been steady in the Twin Cities market. As Talberg says, with permit activity for new apartment construction down 55% from this time last year, the demand for multifamily units will only increase. And that should lead to monthly rents that keep rising.
“It is not a stretch of the imagination to see a rent-growth story in the Twin Cities that is superior to even the Sunbelt states,” Talberg said. “That is a theme that could carry this market as the supply pipeline struggles to keep pace with demand.”