Oak Grove Capital’s Dayton: Apartment boom continues in Twin Cities – but how many renters can’t afford to live here?

Magellan Development Group's LPM Apartments opened last year in the Twin Cities.

Magellan Development Group’s LPM Apartments opened last year in the Twin Cities market.

by Dan Rafter

The numbers are strong: Apartment rents are rising and developers are adding new luxury apartment buildings across the Minneapolis/St. Paul market. Developers are even moving into the Twin Cities’ suburbs to serve the growing number of residents who are becoming “renters by choice” – those who want apartment living and aren’t interested in owning a single-family home.

Ken Dayton

Ken Dayton

And Ken Dayton, managing director with St. Paul’s Oak Grove Capital, says that the multifamily boom in the Twin Cities should last for at least two to three more years before slowing.

But here’s the big question: As developers put up modern apartment buildings filled with amenities such as media centers, green rooftops and 24-hour concierge services, are they neglecting to add enough affordable units to the mix?

What about those Twin City residents working hard to earn $50,000 to $60,000 a year – not a tiny sum, but not a fortune, either – here? If they want to live the urban lifestyle that has become so popular – walking to public transportation, shops, restaurants and theaters while mostly ditching their cars – can they find an apartment unit with a monthly rent low enough for them to afford?

Dayton says that the answer, too often, is “no.”

“I love to see the multifamily sector here so strong,” Dayton said. “But we are really falling short on the affordable side of things. There is a big demand for workforce housing that is not being met. There are some affordable units here. But there aren’t enough to really meet the demand that is out there for the worker making $40,000, $50,000 or $60,000 a year.”

A growing market

It’s uncertain how many new affordable apartment units developers will add to the mix in the Twin Cities. But what is certain is that the area’s multifamily market has been hot for several years.

Marcus & Millichap, in its first quarter apartment report, said that in 2015 developers will bring 5,000 apartments to the Twin Cities market. That will result in a 1.8 percent rise in apartment inventory here.

And developers were even busier last year. Marcus & Millichap reports that in 2014, developers brought 5,700 new apartment units to the Minneapolis/St. Paul market. Since 2010, developers have added 18,400 apartment units to the Twin Cities area, according to Marcus & Millichap.

Demand is still high, though, which means that apartment rents continue to rise, something that is making it a challenge for many Minneapolis/St. Paul residents to find apartment units that they can afford.

LPM Apartments features many of the amenities common to luxury rental buildings today.

LPM Apartments features many of the amenities common to luxury rental buildings today.

Marcus & Millichap reports that a large supply of new luxury inventory means that effective apartment rents will rise 3.6 percent this year to an average of $1,091 a month. In 2014, effective rents rose 3.4 percent, Marcus & Millichap said.

The influx of luxury apartments isn’t hitting just the urban center of the Twin Cities, either. NAI Everest in its first-quarter apartment report said that more than 50 percent of the multifamily developments now under construction in the Twin Cities area are in the suburbs, especially the region’s outer-ring suburbs.

These suburban developments offer one luxury that new urban apartments can’t, according to NAI Everest: space. The company reports that the new suburban developments typically provide larger unit sizes with more storage space for residents who want to downsize from bigger suburban single-family homes.

These suburban developments are also, in their own way, catering to those who prefer to drive less. NAI Everest says that many of the new suburban multifamily developments are located on or near public transportation and near community focal points such as retail centers or suburban downtowns.

Not enough affordable options

Dayton from Oak Grove Capital says that he’s not surprised at the demand for multifamily units in the Twin Cities. Minneapolis/St. Paul, he says, has a lot to offer residents and businesses.

“We have a very diverse economy here,” he said. “There are so many educational, art and employment opportunities here, so we are seeing a lot of migration coming into the market. The new developments really are catering to pent-up demand from people who are electing to be renters by choice.”

It’s fair to wonder if developers are adding too many multifamily units to the area. Is the Twin Cities supply of apartment units about to outpace demand?

Dayton doesn’t think so.

“For now, I think the additions are at an appropriate level,” he said. “We are at low vacancy levels still. There is continued demand for new units. There is a lot of new construction throughout the downtown area, by the stadium, by Wells Fargo’s corporate headquarters. The unemployment rate here is low. We’re going to continue to see strong employment growth in Minneapolis and St. Paul, which will help fuel the need for new apartments downtown.”

But how difficult is it today for renters to find affordable units in downtown Minneapolis/St. Paul? Dayton says that this is the real challenge for today’s Twin Cities’ multifamily market. New apartment units often come with rents in the $2- to $2.50-a-square-foot range, Dayton said. That can make rents too high for many here.

Some developers are adding what are called micro-units – very small units – to their buildings to lower the average monthly rents of their developments. But those units really are tiny, and aren’t always the right fit for workers who want adequate space with their urban experience.

Dayton says that many workers need to find apartment units that rent for $1,000 to $1,200 a month if they want to spend just 30 percent of their incomes on rent each year. Those apartments are out there, but they are growing increasingly rare. And such rents are even rarer with new apartment units, Dayton said.

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