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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.

So how much will those new condos in the Mill District cost?

Last night's news about a new condo project in the Mill District of Minneapolis raised several questions.

The most frequent question from readers: What will the condo units cost?

Unit prices were not listed in the early documents published by the City of Minneapolis Thursday evening. And as of early Friday afternoon, the developer, Shamrock Development, had not returned phone calls we placed. But Shamrock has built several condo buildings recently in the same area of Minneapolis -- known broadly as East Downtown -- that offer some guidance.

In 2014, Shamrock completed Stonebridge Lofts, located next door to the new project, which is being called The Legacy. Most of the 164 units at Stonebridge Lofts sold before the building opened. I found an old listing (from when it was still under construction) for a 2-bedroom, 2-bathroom unit on the 7th floor for $637,900. A more recent listing for a corner unit with two bedrooms, one full bathroom and one partial bathroom was being marketed for $849,000. Both units were between about 1,500 and 1,800 square feet.

Meanwhile, Shamrock is currently selling condos at the 17-story Portland Tower, which is under construction on the northwest corner of Portland Avenue and 8th Street S. The units range from $300,000 to $850,000, according to its marketing website.

Shamrock, led by Jim Stanton, usually sells his condos for lower prices than other developers because of its cost efficiencies, said Joe Grunnet, a realtor with Downtown Resource Group.

"Jim's projects have typically sold for $350-plus per square feet," Grunnet said. "Most developers won't even consider building condos without asking $400 a square foot."

He estimates a two-bedroom, two-bathroom unit in this new project will start around $350,000, topping off with penthouse units from $700,000 to $1 million, depending on layout and views. 

It's unclear how much location and changing market conditions will impact the prices for The Legacy.