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The
Twin Cities multi-family market is experiencing the highest vacancy rate
in a decade. The vacancy hit 7.6 percent year-end, an increase from 6.7
percent at mid-year. However, these numbers are only the physical
vacancies and do not reflect free rent being given by landlords as
concessions. If incentives were factored in, vacancies could be 5 to 15
percent higher.
The
7.6 percent also does not tell the whole story, because there are pockets
in the metro with much higher vacancies, primarily in outlying suburbs and
largely the result of an abundance of new units coming on line. These
pockets include Plymouth, which reports a vacancy of over 12 percent, as
well as Woodbury, Eden Prairie, Maple Grove, Anoka and Champlin.
It was just five
years ago that the Twin Cities multi-family market hit a record-low
vacancy of 1.1 percent, and it stayed relatively flat through third
quarter 2000. However, by spring 2001, the economy started heading south
and interest rates dropped significantly, luring many renters into home
ownership. By third quarter 2002, vacancies jumped to 5.2 percent, and
they have been climbing ever since.
SEVERAL
FACTORS DRIVING VACANCY
Vacancies have
increased so dramatically for several reasons. The first is continuing low
interest rates. Despite the fact that interest rates have edged up
slightly, it is still very affordable for people to buy homes. Since 2004
is an election year, that likely will keep the lid on rising rates.
NEW UNITS KEEP
COMING ON LINE
The
second factor is continuing new construction in an already tough market.
Many of the apartment projects that are under construction were conceived,
approved and financed in 2001 and 2002, when economic conditions were
stronger and vacancies were hovering around a healthy 2 percent. It often
can take as long as three years before an apartment project actually
opens, following a lengthy city approval process and nine to 15 months of
construction.
Some
of the many projects under development include Water Tower and Southwest
Station Apartments, two projects totaling 400 units in Eden Prairie, both
being developed by North American Properties. Also, Dominium has a
186-unit project, called The Bluffs, under development in Eden Prairie as
well as the 130-unit Stone Creek in Plymouth.
LACK OF JOB
GROWTH IMPACTS MULTI-FAMILY MARKET
Lastly, continued
weakness in the local job market is negatively impacting the apartment
market. A decrease in both manufacturing jobs and back-office jobs hit
apartment building owners hard, as many of these workers are renters.
Meanwhile, rental
rates remain flat, yet do not reflect the large number of concessions that
landlords are offering to attract tenants, including free rent. The
average monthly rent in the Twin Cities in the second half of 2003 was
$845, compared with $843 during the first half of the year.
Despite high
vacancies and flat rents, however, both institutional investors and
individual buyers had a strong appetite to acquire metro-area apartment
buildings in 2003. These buyers view the Twin Cities as a stable market
and are counting on it to rebound quickly. They predict a faster recovery
here than in other markets across the country. Sellers have been achieving
hefty prices for their properties. AvalonBay Communities Inc., for
example, exited the Twin Cities in 2003, selling five suburban apartment
complexes for $127.2 million. The buyers were two institutional investors
and one private investment group, and it was the largest apartment sale in
five years.
THE OUTLOOK
Once
the apartment projects under construction are completed, the Twin Cities
will start to see a quieting of proposed new multi-family development. We
anticipate that vacancies might edge up a bit in the first half of 2004 as
a result of new units coming on line, but then they will start to level
out. Concessions will continue to be in full force in 2004 and remain a
big part of the market.
Adding
pressure to the market will be if interest rates remain low and renters
continue to exit the rental market to buy homes.
With
some positive economic news and job creation by mid-year 2004, there may
be a turnaround in the Twin Cities multi-family market, resulting in
stronger demand and tighter vacancies by 2005-2006.
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