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Twin Cities Multifamily Market Update: Spring 2016
Presented to: MN-Northstar Chapter of the Appraisal Institute
2016 Trends Seminar
Presented by:
Brent Wittenberg, CRE
Vice President
Marquette Advisors
612-392-2344
bwittenberg@marquetteadvisors.com
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Discussion Outline
• Twin Cities one of the hottest apartment markets in the
U.S., while single-family construction lags. Why?
• Current development – what, where, why? And who is
renting?
• Trending forward – more of the same? Why or why not?
• Concerns
• Opportunities
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Twin Cities: one of strongest apartment markets in U.S.
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Source: Marcus & Millichap
• Sustained low vacancy (<3%) for 3+ years
• (even with significant supply increases)
• Positive market response to new product
• Steady rent growth
• Strong demand fundamentals: demographics,
economy, growth, in-migration
Source: Marcus & Millichap
Source: Marcus & Millichap
Twin Cities: High “Livability” Rankings
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Impact of strong economy, market fundamentals & “livability” factors is two-fold: 1) Creates in-migration and demand for new housing, especially apartments 2) Flow of capital into Twin Cities by national/international apartment investors
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Solid Fundamentals: Sustained low vacancy + steady rent growth….
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Apartment demand keeping pace with new construction…
Apartment demand tied to job growth…
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Job-growth steady, increasingly dependent on in-migration...
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Adding 35,000+ jobs per year post-recession Unemployment: • Twin Cities: 3.7% • U.S.: 5.0% Twin Cities businesses must recruit nationally: • fueling in-migration
trend…. • which fuels demand
for new housing… • especially rentals
New Apartments – how much & where?
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2003-2012: <8,000 units built
2013-2016: 14,000+ new units
Current cycle: mostly urban
• 70%+ of metro construction
• 60% of absorption
• Preference for urban living.
• Rent premium
Shifting now to suburbs:
• Nearly 60% suburban 2016-18
• Increasing to 55% to 60% in 2015-2018
• Starting with “best in market” suburban
locations (the most “urban” suburban sites)
• Keys: connectivity, walkability.
Slowdown coming, but 2,500+ new units per year
likely the new normal.
• Demographics & lifestyle trends support this
New Apartments – what are we building?
• Luxury high-rise (downtown) and mid-rise (5 over 1) (city and burbs)
• 200-300+ units typical.
• Smaller infill deals (70-100 units), well connected sites. Fewer amenities. Location plays.
• New construction rents $1,300+ per month (Studio & Alcove units)
• Small, efficient units. Reasonable “chunk” price for renter. High rent psf for developer.
• Importance of amenities & common areas. Less space of their own, so need space to “hang out” and congregate.
• Also need to compete with the new building down the street, and they have a pool, a yoga studio, a pet spa, and ___, and a____, ……etc, etc, etc,
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New Apartments – unit mix & rent profile
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Unit Mix (new construction)
• 70% Studios & 1BRs
• vs. 50% pre-2010
• fewer 2BR & 3BR units
• Fits single Millennial renter profile
• Empty nesters want larger 2BR & 3BR --- just starting to deliver more of these
Rent Premium
• Note $600 gap between new product & apartments built pre-2010!
• Value-add potential!
Who is renting?
• New Construction Class “A” – Many are new to Twin Cities (in-migration trend)
– Preference for well located, urban housing
– “Renters by Choice”
– Higher incomes, often less price sensitivity (depends).
– Also some renters relocating/ “upgrading” their housing within metro area.
• Older “B” and “C” apartments still sustain high occupancy levels – Strong economy & job growth are keys to this.
– Similar household composition, but more “renters by necessity”
– Fewer (but some) “renters by choice”
• Millennials having major impact on market – Now are age 25-35 years old….choosing to rent, rather than buy.
– But – what’s next for them?
• Empty nesters renting too, but in smaller numbers (mobility and product issues)
• Other groups: young couples and families, but prefer larger rental homes and townhomes, rather than apartments (larger HH’s)
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Apartment boom -- what’s fueling demand for
rentals?
1. Demographics – growth cohorts (impact of Millenials and
Boomers)
2. Economic growth – business growth, hiring & recruitment,
in-migration
3. Rent vs buy decision…
– Renting is “smart”
– Both lifestyle & economic factors
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Demographics: Impact of Boomers & Millenials
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Economy – growth & labor supply issues
• Adding 35,000+ jobs/yr over last 5 yrs.
• Labor supply issue – low unemployment, worker
shortages locally
– Recruitment outside of market
– And, new employees (in migration) want to rent vs buy, at least
initially
– Also showing strong preference for….
• urban living
• Well-connected dynamic, suburban “mixed-use” environments
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Housing Choice -- Why Rent vs Buy?
Economic Factors
• Cost comparison • Avg. rent 2BR apt = $1,132/month (2015 Q4)
• Avg. sale price $265,000 = $1,480/month (monthly mortgage + tax)
• Price sensitivity comes in at about $1,500-$1,600+ per month….especially in suburbs
• Income-qualified, perhaps. But what about savings? • Down payment requirements higher in many cases.
• Avg. price $265,000 (+/-)
• 5% down payment = $13,250; 20% down payment = $53,000
• High debt levels – impact of college debt – • MN ranks 4th highest nationally in college debt.
• 70% have “significant” college debt. Avg. nearly $40,000 per student.
• Mobility – job/career changes; resale issue and timing
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Housing Choice -- Why Rent vs Buy?
Lifestyle Factors
• We prefer “shiny & new” – and $265,000 doesn’t buy that, or a
yoga studio, pool, roof deck, or a dog salon.
• Design of modern apartments has lifestyle appeal – amenities, gathering spaces. Important to Millennials.
• Prefer urban locations (more rental options here than ownership)
• Maintenance-free living
• Smaller households (single renters opting for Studio or 1BR)… • may not make sense to buy a larger SF home or even a condo
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In spite of all this....expect increasing home buyer
demand
• Young couples & families – more affluent. Preference for urban (especially if no kids or young), but suburbs have appeal also (schools, size/age/quality of home).
• Farther out locations – expectation of size and affordability (drive to afford)…but less of this. Exurban markets not coming back (generally).
• Yes, square footage still matters. Many still want size (growing families). Could be a shift here, however, as more seeking “efficiency” in living environment. Applicable to both for-sale and for-rent products.
• Condos needed!! – limited supply of new product in Mpls. Success of boutique condo projects – Wayzata for example (pricing $600+ psf).
• In-migration of affluent professionals to Mpls last 3+ years fueled demand for luxury rentals. Should be many wishing to purchase in same neighborhood.
• Fewer Millennials can afford new for-sale product (at least what we’re building today). Potentially strong first-time-buyer demand from “aging” Millennials next 5-10 yrs…..but what do they want, and what can they afford?
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Apartment Market Outlook – a shift in the current trend?
Development: new construction will slow somewhat:
• 14,000 new units 2013-2016 (avg. 3,500/yr).
• Partly playing “catch-up” after building only 8,000 over prior 10 yrs….a “freshening” of our
rental product offering
• Construction will slow…..but demand fundamentals are still there. Expect 2,000-2,500+ units
per year to be the new normal for 5+ yrs. Starting to see smaller, niche plays.
• Still lots of demand in Downtown Mpls! Impact of “East Town” – stadium, corporate, park and
other infrastructure.
• Suburban development – best in market locations ripening – connectivity and dynamic “urban”
locations are preferred.
Demand fundamentals remain strong:
• College enrollment in MN: 440,000 (compared to 100,000 more than 10 yrs ago).
• This is next generation of renters (with lots of debt…..so they will rent for awhile)
• Job growth
• Expansion -- +35,000 jobs/year. Increasingly dependent on in-migration. Requires
housing. Typically rental.
• Boomers – empty nesters.
• +75,000 persons ages 55-64 from 2010-2010 in Metro Area.
• Current apartment development model has limited appeal – seeking larger units.
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Apartment Market Outlook – a shift in the current
trend?
• Concern: “Sustainability” of the current development model
• Building mostly for Affluent Millennials. (unit mix, sizes, design, rent structure)
• What about empty nesters? -- preference for larger 2 BR / 3BR floorplans
• What about “aging” Millennials – will they stay in their Studio or small 1BR indefinitely? Can they “upgrade” to a larger unit?
• What about “non-affluent” Millennials? Boomers? recent college grads?
• Just starting to see development shift toward these markets
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Apartment Market Outlook – a shift in the current
trend?
What is the next trend(s) in development?
First must ask -- What’s next for “aging” Millennials? What comes after the Studio or 1BR in
Uptown or Downtown?
• HH size, lifestyle, affordability issues. Yes – renting popular, but many do want to buy homes.
• And many will continue to rent….but seek another type of rental (larger, new or similar
location?)
Housing products & considerations for “aging” Millennials
• Expect uptick in first-time homebuyer demand. Preference City and first-ring suburbs.
Townhomes.
• Demand for urban neighborhood locations (other than Downtown & Uptown). “Quieter” well-
connected urban locations. Somewhat larger rental unit.
• LRT locations? -- still well connected, but not in the middle of the action.
• May actually wish to spend less on rent…..time to pay down debt, and save for home-
ownership.
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Apartment Market Outlook – a shift in the current trend?
Luxury rentals
• Demand driven by affluent empty nesters / mature professionals
• Expect future high-rise development to incorporate more traditional unit mix (more 2BR &
3BR) and larger units
• Expect “boutique” niche developments targeting older adults (e.g. The Lakes Residences).
Large units, high-quality (true condo quality construction)
• Condos needed!
“Micro” Apartments
• Highly efficient studio & 1BR apartments. Price point = $900-$1,400/month. – Studio -- 375-480 sf
– Alcove & 1BR Units - 480-600sf (the size of today’s typical studio apt)
• Yes, there is a market for this! Niche opportunities – don’t expect a wave of these like in
coastal markets. Small 40-80 unit infill deals.
• Location sensitive! -- connectivity is key. Not just LRT! Highways too. Bike & Walkability.
Walk-to restaurants. Easy commute to work.
• Noted demand from young “non-affluent” Milllennials. Recent college grads.
– Also demonstrated demand from fairly affluent residents who are choosing this lifestyle.
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Apartment Market Outlook – a shift in the current trend?
“Value-Add” Opportunities
• Investor interest – local & national – competition fierce for Class “A” and related risk. More
capital flowing into value-add opportunities.
• Opportunity for investment in well-located “B” and “C” assets
• Sustained high occupancy levels
• Check renter demographics – in many cases, indicative of opportunity for rent growth!
• Remember – price premium new construction vs. pre-2010 ($600/month gap)
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QUESTIONS???
Brent Wittenberg, CRE
Vice President
Marquette Advisors
612-392-2344
bwittenberg@marquetteadvisors.com
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THANK YOU!
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