CoStar Market Insights: Increased Sales of Affordable Market-Rate Properties Have Broad Implications
Despite the attention that big-ticket luxury multifamily trades garner in the Minneapolis metro area, the vast majority of deals over the past five years were for lower-rated, more-affordable properties.
While new construction has disproportionately been concentrated in the luxury sector, out of the 1,300-plus sales transactions that have closed from 2014 through mid-2018, a mere 4.5 percent involved 4- and 5-Star apartment buildings.
Conversely, while an extremely limited amount of new construction has delivered in the 1- and 2-, and 3-Star segment, more than 95 percent of the sale deals were for those more-affordable complexes. This can have a ripple effect on affordability issues facing the market, as it has become difficult for many renters to live in a reasonable proximity to their place of employment.
With tight vacancy rates and yields compressing, a popular play has been value-add deals. Investors target properties with below-market rate rents that in some cases may be in need of, or could use a cash-infusion for renovations, which in turn allows for stronger rent growth. Over the same period of time, from 2014 through mid-2018, cumulative rent growth was a solid 9 percent in 4- and 5-Star complexes, while growth in 1- and 2- , and 3-Star properties averaged 16 percent.
Some of this growth can be attributed to increased demand for more-affordable apartments with basic amenities, as the vacancy rate was just above 3 percent midway through the third quarter of 2018. Though rent hikes following renovations that are followed by sales have played a part, and to some degree, has exacerbated the affordability problems affecting many of the market’s residents.
Many of Minneapolis’s most affordable submarkets are in outlying counties far from the urban core. The lack of a comprehensive public transportation system makes it difficult for employees pushed further away from employment nodes to get to work and has made it difficult for some employers to find labor. This issue has ramifications beyond housing, as it could affect the state’s broader economy in terms of productivity and employment growth.
With double-digit vacancy rates and an enormous amount of supply in the pipeline in the 4- and 5-Star segment, it is likely that significant investor interest will remain for lower-rated properties. The spread in rents suggests that there is still a lot of runway to renovate and boost rents and still come in well under the rents being charged in the upper-tier properties.
CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.