The momentum in the Twin Cities’ multifamily market isn’t slowing, even with higher interest rates and nagging inflation. Vacancies in apartment towers in downtown and campuses in the suburbs continue to fall. Demand is still outpacing the supply of available apartments. And investors still view apartments in the Twin City market as safe homes for their dollars.
What’s behind the enduring strength of the Minneapolis multifamily market? And can this sector’s momentum overcome the uncertainty of high interest rates and inflation?
We spoke with Ted Abramson, senior vice president for multifamily with the Minneapolis office of CBRE, to find out. Here is some of what he had to say.
It’s been a challenging two-plus years. But has the multifamily market in the Minneapolis area remained resilient despite the challenges? Is demand still high among both renters and investors for multifamily properties?
Ted Abramson: Everyone was scared back in April of 2020 about what the future might hold. But our multifamily market has remained resilient throughout the pandemic. We are seeing a significant growth in rents. We are seeing a big uptick in the demand for apartments in urban areas. Occupancy levels are much higher today. Concessions have pulled back considerably. Our urban multifamily markets have responded quite well.
Are people returning to downtown Minneapolis? Are they looking for apartment units in the urban neighborhoods again?
Abramson: Downtown is much busier than it was last year. We are seeing more traffic heading into the city. People want to live in the city. Opinions vary on whether we are past the worst of the pandemic. I won’t get into that. But our downtown activity looks more like it had during normal times. That’s a good sign.
How about in the suburbs? Are renters interested in multifamily product in the suburbs surrounding the city?
Abramson: The suburban market remains very strong. This part of the market is really leading the way on the rent growth we’ve seen. Not as many apartment units were developed in the suburbs at the beginning of this cycle, in 2011 and 2012. So demand has remained high for units in the suburbs. When COVID started, that kickstarted the decision that many people in urban areas made: They wanted to move to the suburbs. Of course, it wasn’t just COVID. People often move to the suburbs when they start their families and the get interested in public schools. We are still seeing quite a bit of multifamily development in the suburbs to meet the demand in those markets. New deals are being done and projects being built in third-ring suburbs. And these projects tend to lease up quickly.
Build-to-rent homes – single-family homes designed to be rented out – seem to be growing I popularity across the country. Are you seeing much of a build-to-rent movement in the Minneapolis market?
Abramson: We have seen a lot of growth in the build-to-rent space. That seems to be the sexy new product, the new niche that people want. In a way, it’s like melding townhomes and single-family homes. The development might have a clubhouse on site that everyone can use. But the homes feel more like single-family homes, even though the people living in them are renting, not buying. We are seeing these build-to-rent developments in suburbs such as Maple Grove and Woodbury.
Why is build-to-rent becoming such an attractive option for renters and owners?
Abramson: Part of it is that it serves such a wide demographic. It might be someone who is building a house and has two to three kids and needs somewhere to stay for six to 12 months. Or it could be a 73-year-old couple who want to spend time traveling the world but still want space for their grandchildren to come visit them. The Millennials and Gen Xers with families might want to get into a certain school district. Buying a house can be difficult today. Build-to-rent, then, isn’t just for one demographic. A wide range of people are interested in this type of housing. They can lock their door and leave, but they still have a yard. They might have access to a clubhouse with all the amenities you’d find in an apartment development. It is just a nice option for a lot of people.
It is challenging for many younger buyers to find homes they can afford in most markets today, right? I suppose that is something that is boosting the popularity of the build-to-rent model.
Abramson: It’s tough everywhere. Here, it’s possibly even tougher. There just aren’t enough homes available that you could consider affordable.
What about rising interest rates? Is that having an impact on the demand for multifamily housing?
Abramson: It’s not having an impact on demand from renters. They are still looking for multifamily housing. Apartments might make even more financial sense for them as mortgage interest rates rise. Investors are trying to understand the new paradigm of where rates are today. They are trying to figure out how lenders, banks and life insurance companies are underwriting loans today. When rates jump so much in a short time, it makes sense for investors to wait until the interest-rate environment settles down. But any pause we had in the summer was short-lived. Activity from investors in the multifamily space is definitely back today.
How is the supply of multifamily housing in the Twin Cities and its suburbs?
Abramson: We don’t have an oversupply. There are locations where we have seen a lot of new multifamily development. But our market has been stable overall. We are certainly not overbuilt, so demand for apartment units remains high.
Can you talk a bit about amenities? What type of amenities are renters looking for from newly built apartment developments?
Abramson: There was a race for new amenities at the beginning of this strong multifamily cycle. People were adding golf simulators, high-end pools, anything to set themselves apart. Today, developers are focusing on that work-from-home space, that collaboration space. Many renters still aren’t going into their offices, at least not on a full-time basis. So they want places from home where they can work. That might be conference rooms in a building’s common areas. If you are living in a one-bedroom or studio, do you want to spend all your time working from your unit? Probably not. So instead of providing that big community room, new buildings today are more often providing break-out spaces that people can use when working from home.
Speaking of working from home, are you seeing more people back to work in the CBD of Minneapolis? That would provide yet another boost to the apartment buildings in urban areas.
Abramson: We have an intern who has been in the office every single day. It seems that many people in that younger cohort of workers wants to be back in the office, at least on a part-time basis. They want to be able to meet people instead of spending all their time working from home. There is a group of people who would rather not come back to the office. But there is a group that wants the option to work from the office, too. Target recently announced that they were giving their workers at their corporate offices the choice to work from home or come into the office. As soon as they announced that, the next Monday I noticed a big uptick in the number of people downtown. Target had empowered its employees to make that choice. That younger demo of employees wants to come back to the office. They want that sense of community.
Looking to the future, do you see demand for multifamily housing, both from renters and investors, continuing to rise?
Abramson: We will continue to have demand from investors for Twin City multifamily housing. Renters, too, will continue to seek out apartment living. If it gets more expensive to buy a house, if mortgage interest rates continue to rise, more people will stay put in their current single-family homes for a longer time. That makes the barrier for entry for first-time homebuyers even more challenging. Combine that with the silver tsunami of former homeowners who want to move out of their single-family homes and move downtown, and there are some strong factors fueling the multifamily market.
