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!