twin cities apartment market conditions winter 2014/2015 brent wittenberg – marquette advisors...

Twin Cities Apartment Market Conditions

Winter 2014/2015

Brent Wittenberg – Marquette Advisors

612-392-2344

bwittenberg@marquetteadvisors.com

Apartment Trends – Winter 2014/15

• Twin Cities remains one of the strongest apartment markets in the U.S.!

– Sustained low vacancy (<3.0% metro);

– Steady rent growth;

– Strong demand fundamentals.

• Deep & diverse economy. Job Growth! In-migration fueling demand.

• Increasing propensity to rent – economic & lifestyle factors.

• Favorable demographics (Millenials and Boomers)

• Millenials fueling demand. Preference to rent; all income levels.

• Empty nesters too, but smaller numbers to date.

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One of Strongest Markets in U.S.

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Source: Marcus & Millichap

Apartment Trends – Winter 2014/15

• One of most active new construction markets in U. S.

– Expect 12,000+ new units 2014-2016 . Includes 3,500 in Downtown Mpls.

– Major supply increases in Mpls creating competitive market. However, NOT a demand problem. Do NOT expect overbuilt submarkets. New product being absorbed; very limited use of concessions/incentives by apartment owners.

– Healthy market experiencing absorption & temporary vacancy adjustment in active submarkets, expect market re-balance to 5.0% vacancy by late 2016.

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Up to 12,000 new units 2014-201612,000 new units 2014-2016

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Rents & Vacancy by Submarket

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Rent GrowthSubmarket Vacancy Avg. Rent Trailing 12 Mos.Downtown Mpls 3.1% $1,422 5.9%Mpls - Out-of-Downtown 2.1% $944 2.9%Downtown St. Paul 7.6% $1,347 12.7%St. Paul - Out-of-Downtown 3.1% $910 0.4%NW Suburbs 2.7% $977 3.5%NC Suburbs 2.1% $922 4.7%NE Suburbs 2.3% $901 2.3%SW Suburbs 2.5% $1,106 2.4%SC Suburbs 1.9% $960 0.4%SE Suburbs 3.3% $982 -3.4%TC's 7 County Metro 2.4% $1,007 2.3%

2014 Q3

Market Rents by Product Type

How many new apartments, and where?

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New Apartments -- What are we building?

• A big splash with amenities.• Design for single-person households• Small, efficient units. Increasing popularity of Studio & “Alcove”

floorplans

• Studio, Alcove, 1BR – 2/3+ of the unit mix today • Fewer 2BRs – 20% today vs. 30% to 40% in past

– Fits Millenial renter profile. Not necessarily empty nesters, with preference for larger 2+ BR floorplans.

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Who is Renting?• Demand for new, luxury product especially is driven by in-migration, job transfers.

– Preference for well located, urban housing

– Higher incomes, often less price sensitivity

• Also renters relocating/”upgrading” their housing w/in metro area.

• Limited cannibalization, however, of existing apartments. And older apartments able to quickly re-lease. Strong economy & job growth are keys to this.

• Millenials having major impact on market

– Now are age 25-35 years old

• Empty nesters too, but in smaller numbers

• Other groups: young families (including immigrants), but larger rental homes and townhomes, rather than apartments

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Population Growth by Age

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•Note growth in ages 25-34 and 35-44 groups. Front end of Millenials aging into their 30’s now. Where will they want to live?•What about boomers/empty nesters?

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Area/Age Cohort Number Pct. Number Pct. Number Pct. Number Pct. Number Pct.

Metro Area0 - 14 580,998 22.4% 691,240 20.2% 715,158 20.0% 110,242 19.0% 23,918 3.5%15 - 24 383,424 13.6% 458,809 13.4% 454,268 12.7% 75,385 19.7% (4,541) -1.0%25 - 34 420,311 15.4% 484,875 14.1% 489,570 13.7% 64,564 15.4% 4,695 1.0%35 - 44 391,324 17.8% 453,471 13.2% 487,757 13.7% 62,147 15.9% 34,286 7.6%45 - 54 440,753 13.7% 494,705 14.4% 458,444 12.8% 53,952 12.2% (36,261) -7.3%55 - 64 326,007 7.6% 429,009 12.5% 464,945 13.0% 103,002 31.6% 35,936 8.4%65 - 74 163,425 4.9% 241,341 7.0% 300,938 8.4% 77,916 47.7% 59,597 24.7%75+ 143,325 4.7% 174,408 5.1% 199,078 5.6% 31,083 21.7% 24,670 14.1%Total 2,849,567 100.0% 3,427,858 100.0% 3,570,158 100.0% 578,291 20.3% 142,300 4.2%M edian Age 34.2

Sources: U.S. Census; ESRI; M arquette Advisors

2010 2014 2019 Change, 2000-2014 Change, 2014-2019

Population Age Distribution, 2010-2018Twin Cities Metro Area

Why rent?• Increasing propensity to rent, rather than buy. Why?

• Lifestyle Factors

– Prefer urban locations (more rental options here than ownership)

– Maintenance-free

– Smaller household (single renters opting for Studio or 1BR living)….may not make sense to buy a larger condo or house

– Design of modern apartments supports socialization – amenities, gathering spaces. Important to Millenials.

– MOBILITY! -- Renting provides mobility. Could I sell my home?

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Why rent?• Economic Factors

– Mobility – resale issue and timing

– Cost factors. Income-qualified, perhaps. But what about savings?

– Down payment requirement. 20%? $80-100,000+ in many cases, especially urban and popular suburban markets.

– Lack of savings – high debt levels

– College debt –

• MN ranks 4th highest nationally.

• 70% have “significant” college debt. Avg. nearly $40,000 per student.

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Twin Cities Market Outlook• Market Rate Apt Construction:

– Construction: +12,000 new units 2014-2016.– Demand: Market absorption 3,000+ units per year.– Expect temporary market vacancy adjustment, but demand generally in line with supply– Vacancy: 2015-2016: 3.8%-4.5% (predict will not exceed 5.0%)

• Demand fundamentals remain strong:– Strong economy: 30,000+ new jobs per year– Employee recruitment/retention key to success of economy. Requires attractive ,

appropriately designed and priced new housing!– Demographics: impact of Millenials.– Rent vs buy decision. Economics & lifestyle factors make renting attractive.– College enrollment trend. 440,000 in MN colleges vs. 350,000 10 years ago!– Avg. college graduate nearly $40k in debt – renting makes sense.

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What’s Next• Downtown/Uptown Minneapolis markets are hot. But what’s next?

• Not all can afford, or want to live in central cities. What about other locations?– Similar location fundamentals apply -- proximity to jobs, goods/services, dining/shopping,

recreation, highway/transit access, walkability – “walk-score”

• Downtown St. Paul becoming more active.

• Light Rail Transit Corridors! Potential for SW-LRT

• What will Millenials want next? First wave of this group aging into early 30’s. What’s next after that Uptown apartment?

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