The Twin Cities’ multi-family market remains strong as 2012 heads into its third month. In this, Minneapolis/St. Paul is hardly alone; multi-family ranks as the top commercial market in most major Midwest cities.
But the Twin Cities do boast of one unusual fact: While landlords are expected to fetch higher rents this year, the vacancy rate of Minneapolis/St. Paul multi-family properties is actually expected to rise.
Researchers with Marcus & Millichap came to this conclusion in their 2012 Twin Cities’ market outlook.
According to the company, vacancy rates in the area’s multi-family market should rise 20 basis points in 2012 to 2.8 percent. This is largely thanks to a mini-construction boom in multi-family here. Marcus & Millichap predicts that multi-family completions will exceed an increase in demand in this market segment.
Still, this won’t hurt building owners too much. Marcus & Millichap reports that Minneapolis/St. Paul will still hold the nation’s third-lowest multi-family vacancy rate in 2012.
At the same time, Marcus & Millichap predicts that building operators will be able to raise asking rents 2.9 percent by year end to an average of $987 a month. Effecive rents will rise even higher, jumping 4.5 percent to an average of $956 a month by the end of this year.
Multi-family experts across the Midwest say that this market segment, in both Minneapolis/St. Paul and in most major cities across the region, will remain strong not only in 2012 but beyond.
“Multi-family is certainly one of the advantaged property classes in commercial real estate right now,” said Dan Hampton, senior vice president and head of U.S. commercial real estate for BMO Harris Bank N.A. “We have seen a real pick-up in multi-family this year and late last year. We’ve closed acquisitional loans, refinance loans, construction loans for good projects, all in the multi-family market. And we are interested in continuing to look at these loan opportunities.”
The best news for the multi-family market is this: This market segment remains strong for several reasons, not just one.
Foreclosure numbers remain at unhealthy numbers across the country, with RealtyTrac confirming that foreclosure filings were reported on 610,337 properties in the third quarter of last year, an increase, though slight, of less than 1 percent from the previous quarter. That’s a lot of people who’ve lost their homes; they have to live somewhere.
At the same time, lenders today have tightened the requirements that potential homeowners must meet to qualify for mortgage loans. Real estate columnist Kenneth Harney, writing for the Washington Post, reported early this year that home loans originated for purchase or guarantee by Fannie Mae and Freddie Mac now carry average FICO credit scores in the 760 range. That’s a record-high. Loans insured by the Federal Housing Administration now have average credit scores just above 700.
There was a time when lenders considered FICO scores of 620 to 640 good enough. In fact, that time wasn’t even that long ago — try the housing boom years of 2004 through 2006.
There are other reasons why people are choosing multi-family living: More people are migrating toward urban centers such as the Twin Cities because these are where most the jobs are today. Single-family housing in big cities remains expensive, so potential homeowners in these urban centers are instead becoming renters.