News: Minneapolis Apartment Market

 

By Keith Collins, CB Richard Ellis

Although healthy fundamentals existed market-wide for most of 2008,
a noticeable slowdown occurred in the fourth quarter.  Apartment
rents declined 1.7% in the 4th quarter resulting in a 0.7% net gain
for the year. Infill locations continue to be the best performer as
evidenced by the city of Minneapolis 4.4% rent growth in 2008.
The current apartment vacancy rate remains at a healthy 4.9%
as of the 4th quarter. 
The Twin Cities lost 43,000 jobs in the 13 county metro area
(all in the second half of the year) during 2008. While the Twin
Cities rental housing sector has been the benefactor of the “for sale”
housing fall-out, where the median home sale price decreased 13%
to $195,000 during the past 12 months, our market cannot sustain
continued job losses without negatively impacting rents. Rents are
likely to remain flat for Class A product this year while Class B and
C product may see rent increases in the 1% - 1.5% range.
Approximately 1,000 units were delivered in 2008 (down 30% from
planned) and several proposed projects were tabled due to the
challenging debt and equity markets.
Sales volume for properties valued over $5 million in 2008 totaled
$312 million, down from $431 million in 2007.  The remaining
apartment REITs (AIMCO and EQR) continued to sell-off their
Midwest assets. Principal Global Investors, a life insurance company,
and Cornerstone Real Estate Advisors, a pension fund advisor,
selectively sold as well. 
Strong local ownership has stepped in for the institutional buyer.
Many investors, both local and national, look at the Minneapolis-
St. Paul market as a safe haven during these difficult economic times.
And although return parameters have lifted during the past 3-4 months
(cap rates for Class A currently 6.5% -7%), the stability and diversity
of the local economy and current property fundamentals have so far
prevented capitalization rates from rising on par with other large
metropolitan communities throughout the U.S. Investors are currently
targeting cash-on-cash returns in the 8% - 10% range. 
It is clear that 2009 will be a challenging year, but after a 15% drop in
pricing in late 2008, a lack of new product coming to market, the
widespread acceptance of rental housing, and the benefit of a diverse
economic base, the Minneapolis-St. Paul market is well positioned to
weather the current recession.

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Posted at: 2:07 pm on February 11th, 2009

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