Posted: 7:45 am Tue, September 6, 2011
By Burl?Gilyard
Tags: aparments, Brent Wittenberg, development, Joe Grunnet, Mark Nordland, Steve Minn, vacancy rates
The 216-unit Flux apartment project, which apparently is pet-friendly, is under construction in the Uptown area of Minneapolis. (Staff photo: Bill Klotz)
Most of the activity in local development circles today boils down to one word: apartments.
With the Twin Cities rental vacancy rate at the lowest point since the late 1990s, a host of developers are competing to build new apartment projects. Developers being developers, they believe they can out-hustle their competitors to land city approvals, secure financing and start construction.
Most observers acknowledge that not every proposed project will be built. Finance & Commerce tallied approximately 8,500 market-rate, affordable and student apartments units that are either under construction or proposed across the Twin Cities. As the market heats up, skepticism is increasing about the depth of the demand.
Developer Steve Minn, a principal with Minneapolis-based Lupe Development Partners, is particularly wary about the increasing volume of plans for luxury apartment buildings. He says there is a large ?shadow market? of condo units that are not tracked as apartments in market studies but are being rented out.
?I don?t see it. There?s just too much of a shadow market there already in both unsold and investor-owned condos. There?s just not that much unsatisfied demand. I think the leasing activity in the condos is actually doing quite strongly right now,? said Minn, who has developed condo and apartment projects.
Brisk leasing in ?shadow market?
Joe Grunnet, a broker and owner of the Minneapolis-based Downtown Resource Group, confirmed that his company is doing a brisk business renting condo units.
?It is a true shadow market. Our average rent is about $1,640 a month, and we average about 33 deals every month. It?s busy as hell out there right now,? Grunnet said. ?We?re getting a nice influx of white-collar jobs. We?re in the trenches. We don?t listen to the media.?
Minneapolis-based Marquette Advisors reported local market-rate apartment vacancy at 2.4 percent at the end of June ? the lowest vacancy rate in a decade. The report does not track owned units that are leased to renters.
Brent Wittenberg, vice president with Marquette Advisors, said he is encouraged by the market, which has seen strong absorption of apartments. Wittenberg acknowledges that the number of proposed apartments in the Twin Cities can sound daunting.
?Everybody?s got a list that adds up to something like 7,000 units. The question is what?s real and when does it become real,? Wittenberg said. ?I think what we will see is some very competitive submarkets. We can?t build everything at once and all in the same space. These projects will take time. Some of them won?t come to fruition.?
From overbuilt to low vacancy
In response to low vacancy rates of the late 1990s, developers built a spate of projects, many of them in the suburbs. In retrospect, the market became overbuilt.
?We built significant numbers of new units heading into a recession,? Wittenberg recalled. Local vacancy peaked at 7.6 percent in the fourth quarter of 2003.
An analysis of local projects by Finance & Commerce tallied more than 1,300 apartments currently under construction including market-rate, student and affordable projects. That includes the 216-unit Flux property in the Uptown area of Minneapolis, the 120-unit Stadium Village Flats near the University of Minnesota campus and the 234-unit Genesee project in Bloomington.
Bigger plans loom on the horizon.
The Chicago-based Magellan Development Group is proposing a 36-story, 355-unit tower at the edge of downtown Minneapolis near Loring Park. Two Minneapolis developers, the Ryan Cos. and the Excelsior Group, are proposing a redevelopment of the former Jaguar car dealership in downtown Minneapolis calling for about 280 apartments on a site once envisioned as a luxury condo tower.
Last year, a team of developers pitched plans to redevelop a site at 2225 Lake St. E. in Minneapolis. Plans called for 500 units of housing, including 350 market-rate apartments. The project has many partners and many moving pieces, but it?s not clear where the plans stand. Mark Nordland, the development manager for the project, did not return a phone call seeking comment.
Wittenberg said the pace of development is still slower than the pace at which people have been renting apartments. The second-quarter market report from Marquette Advisors reported that 3,460 apartments had been absorbed during the first six months of the year. (Absorption measures new and existing units that have been leased during the reporting period.)
Marquette Advisors also pointed to state statistics, which showed the Twin Cities added 16,400 jobs in the first half of the year. Job growth is a key driver for apartment rentals.
?If you look at the downtown [Minneapolis] market over the last 18 months, we?ve seen the absorption of 620 units, and that includes the addition of one project, Mill District City Apartments, during that time frame,? Wittenberg said, noting that the new building has 175 apartments. ?Demand should surpass the most recent [absorption] levels.?
The 234-unit Genesee project is under construction in Bloomington. (Staff photo: Bill Klotz)
Building in the ?burbs
And while the bulk of apartment proposals have been in core urban areas, the Florida-based LeCesse Development Corp. has plans for a two-building, 440-unit complex in Maple Grove called Skye at Arbor Lakes.
?There?s very little that?s been developed in that area over the last several years. We see that as an opportunity to build a new high-quality development,? said Tom Hayden, director of development with LeCesse Development.
Hayden, who estimated the project budget at $70 million to $80 million, said the climate for financing projects is improving.
?We?re optimistic that it?s going to come together and we?ll be able to start in the spring,? Hayden said.
In Hopkins, the Beard Group is just starting construction on the 54-unit, $13 million Marketplace & Main.
?It?s a good market. We feel that Hopkins is centrally located. We felt like this is a good place to be. There hasn?t been any new product since the 1970s,? said Tom Gump, a principal with the Hopkins-based Beard Group.
Lending standards are tougher
Lenders have been generally enthusiastic about apartment deals, but most observers agree that lending standards are tougher than they used to be.
Eric Rogers, a senior vice president with the local office of Associated Bank, said his bank is lending on apartment projects but is analyzing project locations and the overall capacity of the market.
?We?re probably looking at five or six projects right now. We?re selectively active. We?re going to do a few more apartment deals. We?re just going to pick and choose the ones we do,? Rogers said.
Rogers said the bank wants to know that project ?sponsors? ? developers or other investors behind a deal ? are both seasoned and have resources to ride out unexpected tough times.
?Right now we?re increasing our focus on sponsorship. It?s just managing the risk of overbuilding. We want to be with the people that ?get? the market and can support a project if occupancy starts to trend downward,? Rogers said.
Norm Bjorness is part of a development team that has been working to develop the 104-unit Oaks Station Place along the light rail transit line in Minneapolis. Bjorness said his group is working on the financing and hoping to start construction this year. But he said deals are more complicated.
?The whole system moves a lot slower than it used to. That?s just the new order of things. You can move about half as fast as you used to be able to move,? Bjorness said.
Echos of the condo craze
In some ways, the apartment fever seems to echo the condo development craze a few years ago.
Mary Bujold, president and director of research for Minneapolis-based Maxfield Research, said that 4,169 new condo units were completed in downtown Minneapolis from 2004 through 2007.
?We started to really see a significant increase between 2003 and 2004,? Bujold recalled of the condo boom years. ?It started to cool in ?07.?
But Bujold said she sees condos and apartments as two distinct markets and noted that it takes more time to fill condo buildings because selling is more involved than leasing.
For an apartment mania skeptic like Minn, the bottom line is that he doesn?t see enough economic expansion to support an endless supply of new apartments.
?We are not adding jobs, we are not creating new employment opportunities and we are not expanding the economy in such a way that additional high-end living spaces are in adequate parallel with the demand that is there,? Minn said.
Apartment Tracker: F&C has launched an online Apartment Tracker, which will be updated frequently here.
Source: http://finance-commerce.com/2011/09/analysis-8500-apartment-units-proposed-across-twin-cities/
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