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Twin Cities home builders more hopeful about the prospects for the industry this year

Twin Cities home builders are “slightly optimistic” about market conditions for the coming year, according to a new quarterly sentiment survey of 35 industry leaders launched this week by the University of St. Thomas Shenehon Center for Real Estate.

This outlook survey, conducted in partnership with the Builders Association of the Twin Cities, is patterned after St. Thomas’ Minnesota Commercial Real Estate Survey, which began in 2010. It asks survey takers to assign a number, from zero to 100, for each of six questions. A midpoint score of 50 is neutral; scores higher than 50 indicate a more favorable outlook while scores lower than 50 indicate a more pessimistic outlook. The survey also provides a composite score, or overall average, for the six questions.

That same panel of 35 builders will be polled every three months about their expectations in six key areas of the housing market one year in the future. “Since they are involved in creating new housing units and adjusting supply-to-demand conditions, these individuals are close to the actual changes taking place in the market." said Herb Tousley, director of real estate programs at the university.” 

The first survey, conducted in December 2015, produced a composite index of 53. Here are those scores with a bit of analysis from Tousley:

  1. Housing Starts: 61 This score indicates an optimistic expectation by the panel that the number of new single-family housing starts will increase in the coming year.
  2. Square-foot sale price: 69 This reflects the panel’s strong belief that sale prices will be significantly higher a year from now.
  3. Land prices: 44 This indicates a concern that some of the gains from increased sale prices and more building starts could be offset by higher land costs.
  4. Availability of finished lots: 56 This indicates modest optimism that there will be more finished lots available over the next 12 months. That’s a good thing for the market since it helps moderate land prices and encourages more construction.
  5. Cost of building materials: 41 Like land prices, this score indicates a concern that some of the gains from increased sale prices and more building starts could be offset by the higher costs of building materials.
  6. Mortgage rates: 42 This reflects the panel’s expectation that mortgage rates are going to increase moderately over the next year.

In a statement, David Siegel, executive director of the Builders Association of the Twin Cities, said the survey results will offer useful insights and make it easier to predict trends. “Coming off a flat 2015 for the home building industry, this is a great sign that our builders are optimistic for brighter year ahead...our initial survey results reflect a mixed optimism in some areas and pessimism in others, and we hope our members use this information to stay ahead of trends and issues.” 

For apartment rentals, lap of luxury shifts to Twin Cities suburbs

It could be another record-breaking year for luxury apartment construction in the Twin Cities this year, but with some areas reaching a saturation point, most of that development will happen in the suburbs. That’s according to a market outlook from the Minneapolis office of NAI Everest, one of several firms that’s keeping tabs on the rental market in the Twin Cities. 

NEW UNITS: Last year, 3,642 new apartments came to market, and this year apartment construction is expected to be on pace with the previous three years. As of February, nearly 700 units have already opened and at least another 4,700 units are now under construction and are expected to be delivered this year or sometime in early 2017 depending on construction schedules and weather. That’s on par with about 15,000 units delivered during the previous three years and it doesn’t include at least 12,000 units that have been planned or proposed.

After several years of focusing on projects in the downtown, North Loop, Uptown and University of Minnesota neighborhoods, developers will shift their attention to the suburbs where more than half of the new units are expected to be built. Here are a sampling of what’s happening in the region:

  •  In Downtown Minneapolis, 457 units are under construction and about 1,900 units have been planned or proposed.
  •  The North Loop has slowed dramatically, only 149 units are under construction and 690 have been planned or proposed.
  •  In the east suburbs, no new units are under construction, but 495 have been planned or proposed.
  •  The west suburbs are where all the action is at the moment. Nearly 1,000 units are under construction and 2,141 have been planned or proposed.

VACANCIES Since the housing crash and subsequent declines in the homeownership rates, demand for rentals has outpaced supply in many parts of the metro, putting property managers in the driver’s seat. Despite thousands of new units, the vacancy rate throughout the Twin Cities metro at the end of 2015 was just 3.1 percent. A vacancy rate of five percent is considered evenly balanced.

— The tightest market was the northern suburbs where the average vacancy rate at the end of the year was 2.3 percent.

— The average vacancy rate in downtown Minneapolis was 6.3 percent not withstanding that a whopping 581 units that came online between September and December 2015.

— The vacancy rate in downtown St. Paul was 4.1 percent. 

RENTS With a shortage of rentals in many submarkets, especially the suburbs, there’s been upward pressure on rents, which increased 5.4 percent compared with the previous year. 

The biggest increases were in the southwest metro (7.8 percent) and downtown St. Paul (7.4 percent). Rents in downtown Minneapolis increased 6.4 percent by the end of the year with an average rent of $1,373 compared with $1,077 outside of downtown. New buildings are fetching an average $2.25 to $2.75 per square-foot and have exceeded lease – up projections, according to NAI president, Gina Dingman.

APARTMENT SALES Buyers, especially big-city institutional investors, continued their buying spree in the Twin Cities last year, setting several records for price per unit. For transactions of $2.5 million or more, total volume last year was about $970 million, not including deals that might closed at the end of the year, but have not yet been reported. That exceeded 2014. Dingman during the fourth quarter alone there were $240 million in sales with an average price per unit of $148,920, a 46-percent increase from the previous year. And the Walkway, a 92-unit luxury apartment building in Uptown that’s best known for its cantilevered hot tub, was a record-setter last year with a per-unit price of $437,000. The entire project, which includes nearly 20,000 square-feet of retail space, was bought by JP Morgan last summer for $53,750,000. Some of the most aggressive buyers were national apartment owners and managers, including Weidner Apartment Homes of Kirkland, Washington, which made about a half-dozen acquisitions.