I recently attended the 19th Annual Minnesota Real Estate Journal's Apartment Summit. I'm not sure of the actual attendance but it looked like there was more than 700 commercial real estate professionals.
There were great discussions covering demographics, market trends, sales volume, pricing, capital markets, construction, development and management.
I can't relay everything that was covered in the 5-hour event but here are a couple of notes that I thought you might find interesting:
Demographics and Transaction Trends Panel
- The Twin Cities has seen record-setting net deliveries in the last 3 years:
40,000 new apartment units since 2020. That's a 17% expansion. This puts us at number 8 in the country for Inventory Expansion in that timeframe. - In 2023 we were the 12th highest metro in the country for units delivered.
- Within the Twin Cities - Minneapolis saw the most new units with 2,539. Minnetonka was 2nd (1,060) and Maple Grove was 3rd (985). St Paul (i.e. the ONLY city that has rent control) was in 7th place with 463 new units in 2023.
- Despite the above facts, the Twin Cities ranks number 7 for Supply/Demand Imbalance since Q1 2020. This means we are still short 8,800 units.
- When focusing on "3-Star Apartments" (Costar's classification for most class C buildings), the Twin Cities is number 1 (out of the 50 largest US Markets) for absorption. Units are getting rented!
- If no new properties were built, it would take 2.2 years to absorb the new inventory.
- The pullback in projected net deliveries for 2024 ranks among the most substantial nationally. We're expecting a sharp drop in new building in 2025 (largely due to high interest rates and instability in the capital markets).
All of this means that - even though we've been seeing a lot of new construction, and to the unknowing on-looker, it may seem like we are quickly going to be over-built, the statistics say just the opposite.
We are in a very healthy place to expect continued rent growth. We are expecting approximately 3.6% annual rent growth in 2024, followed by 3.8% in 2025.
Minnesota was ranked number 18 for in-migration. That's not great, but there are 32 states that are worse.
- Reasons that people move to MN include proximity to family, housing affordability, recreation - among other factors.
- The Twin Cities has seen higher annual wage growth as compared to annual multifamily rent growth. Our effective Rent-To-Income ratio has decreased to about 18%. In fact, the Twin Cities is one of the more affordable places in the country to live and rent.
- Within the Twin Cities - Wright county, Cass County and Isanti County (i.e suburban and rural areas) have seen the highest increase in population.
- Our state capital, St Paul (i.e. high crime, high taxes and government overreach) has seen the some of the biggest population loss.
Multifamily Broker Panel:
Sales volume of apartment buildings was down approximately 50% and transaction volume was down approximately 35%.
2023 was tough for brokers - especially for the 1st half of the year.
The transactions that did happen were often estate sales, "tired" landlords and a couple of distressed sales.
Some recent sales are showing asset values down by about 25%.
However current valuations are very fluid. If anyone is considering selling in 2024, they should be asking their broker for a price opinion about every 90 days.
Urban assets don't seem to be driven by cap rate. Low cap-rate purchases indicate that the acquisitions are driven by intrinsic value and hopes of future valuations.
Another panelist suggested that:
- A-class suburban properties are often being purchased with negative leverage for about 12 months
- B-class properties typically trade with some positive leverage.
- C-class properties typically trade with very positive cash flow.
One panelist said that property insurance is up 20% for 2024. This is on top of previous increases.
Staffing for on site positions has been very challenging, making it difficult to operate efficiently.
Institutional players have mostly been sitting on the sidelines. They are lemmings, waiting for the herd to gather confidence.
Local players are being more active as they see prices that resemble what they were used to from 5 years ago.
The Twin Cities has a great long term outlook.
Outside buyers are intrigued and considering options.
Cap rates have been in the mid to upper 7s for C class properties.
It seems that 80% of the buyer pool for St Paul apartment buildings has disappeared. The layers of bureaucracy and keeping up with changes to the code seems too arduous for investors that have other options.
This makes St Paul a huge opportunity for those that are willing to work the system.
The potential of rent control in Minneapolis is a concern for the future but investors are still active since it hasn't happened yet.
Rent control has become a national conversation taking the spotlight off of MN.
Agency debt seems to be more competitive than bank debt.
Sellers can do better on their sale if they can be creative with a contract for deed, seller carryback, or loan assumption. These were a popular options in the 1990s but largely phased out when cheap debt was available.
Many active syndicators have pulled out but the underlying capital and demand is still strong. They just lack confidence to move forward.
New development is challenging for build to sell since valuations are so difficult to predict.
Build to rent (or keep) is more manageable since cash flow is easier to predict.
Building affordable housing seems to be a growing trend.
Capital Markets Panel
The fed funds rate hasn't moved, so local bank loan rates are still higher, while agency debt options have come down.
Many properties are experiencing higher than normal year over year increases to expenses. This is causing more strain on NOI and effectively causing lending to be more difficult.
Since the biggest borrower is the government people are hopeful that those in charge of rates won't allow rates to go much higher.
You can't solve a debt problem with more debt.
Cost of capital is likely still going up.
One panelist offered this insightful quib: "Rates could either go up, go down or stay the same."
Since nobody knows where rates are going, it's a good idea to diversify your exit options and stager future refi dates.
Property Management Panel
In previous years at this conference, we were talking about an amenity race.
Now we're talking about making tenants feel safe. Things like secured entry, surveillance cameras and security professionals are important considerations.
This affects the net operating income so it needs to be done wisely.
Great internet is a key amenity.
However, our market hasn't proved a rent premium for Smart units.
Whatever amenities you are providing - make sure they work and provide quick response to resolve issues.
Technology needs to be simple and obvious so it doesn't cause frustration.
Community events are a key way to encourage resident retention.
It's a time-tested fact that food can bring people together.
Remember that this is a people business. Use tech to be efficient so that you can pause and spend time with residents.
People are nicer to people they know.
Renters are smart.
Information is readily available.
Distance to work isn't as important with more flexible work options available
You need to set yourself apart and show how your community is special.
Virtual tours aren't really in demand anymore.
Prospective renters want a personal touch.
Summary
If you're in the Twin Cities Multifamily market then you definitely will want to attend the next summit. The amount of information can be overwhelming but it is very insightful. The demographic shifts, market trends and panel discussions emphasize that the Twin Cities multifamily market is resilient. Those that have implemented wise strategies will be able to take advantage of the opportunities and overcome the challenges.
