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Outside investors pounced on the Twin Cities metro last year, leading the acquisition and development of dozens of apartment buildings, commercial spaces and office towers, including some of the most iconic office towers on the downtown Minneapolis skyline. These non-local buyers, mostly hedge funds, institutional investors and wealthy individuals, have invested billions of dollars in these buildings. Experts say the trend is a reflection of the region’s strong economy, including a lower-than-average unemployment rate and the second-tightest rental markets in the nation.

Jim Gehrz, Star Tribune

Out-of-state investors target Twin Cities real estate

  • Article by: JIM BUCHTA and JANET MOORE
  • Star Tribune
  • January 12, 2014 - 10:17 AM

Out-of-state real estate investors from Malaysia to Miami are spending billions on Twin Cities apartment complexes and commercial buildings, including some of the most iconic office towers on the downtown Minneapolis skyline.

Even celebrity rainmakers like Chicago-based real estate king Sam Zell are forking over big dollars for property in local ZIP codes.

“An unprecedented amount of cash is flowing into the Twin Cities,” said Abe Appert, a vice president with the CBRE office in Minneapolis.

These outside buyers, mostly institutional investors, real estate investment trusts and wealthy individuals, are attracted to the Twin Cities because of its strong, diverse economy and relatively low housing prices. In addition, the area has one of the tightest rental markets in the country, and outside money is helping fuel a building boom.

On the commercial side, real estate investors are finding themselves priced out of more-expensive markets on the coasts. So they’re hunting for top-notch properties in strong secondary markets like Minneapolis, St. Louis and Denver.

“As returns get tighter from their core markets, institutional investors are really challenged to continue to earn a good return, so they’re digging into secondary markets,” said Mark Kolsrud, senior vice president of investment sales for Colliers’ Twin Cities office.

But outside investors are a picky lot — they tend to snap up the most-desirable or “core” assets locally, Kolsrud added. Some of these properties are relatively glamorous, such as the signature IDS Center, Minnesota’s tallest building. Others are relatively obscure, including a dozen workhorse office/industrial suburban properties that were sold last month to a Connecticut buyer for $56 million.

In the first three quarters of 2013, five Twin Cities office properties, including some already owned by outside investors, raked in more than $1.7 billion, while industrial properties gleaned about $116 million, according to a Colliers report. (Full-year numbers are not yet available.)

An overlooked market

“We’re a market that people didn’t pay much attention to before,” said Herb Tousley, director of the Shenehon Center for Real Estate at the University of St. Thomas. “But now some of these institutional players are looking for a place where they can put a good chunk of their money to work.”

At CBRE, sales of apartment complexes are up 25 percent over last year — and eight of the company’s 10 biggest deals involved out-of-town investors. Six of those buyers were first-timers in the Twin Cities.

That includes Stoneleigh at the Reserve, a 361-unit apartment complex in Plymouth, which sold for $53 million to a management company in Kirkland, Wash. And a Dallas-based real estate investment firm paid $37.25 million, or a record $236,000 per unit, for the 158-unit Lake Calhoun City Apartments in Minneapolis.

Appert said he received bids worth more than $3 billion for just $500 million worth of sales last year, all of it coming from outside the region, suggesting plenty of pent-up demand for local buildings.

“We’re even starting to hear rumblings from foreign capital about investment in this market,” he said.

From Malaysia to North Loop

When Brunsfield, a Malaysian development company, was scouting for a place to build its first U.S. project, the company chose Minneapolis. Recently, the firm opened the Brunsfield North Loop, a boutique apartment building in a hip neighborhood on the edge of downtown.

Vincent Lim, general manager for Brunsfield America, said the company chose Minneapolis because of the state’s healthy economy, the abundance of international companies that are headquartered here, and a healthy and well-educated workforce.

“And we are actively pursuing other development sites,” said Lim, noting that the company is particularly interested in sites near the University of Minnesota or in the Linden Hills neighborhood.

The Brunsfield North Loop is among dozens of Twin Cities apartment buildings that have been bought or developed by companies new to this market. That includes Greystar, a Houston company that’s building several hundred units in the Uptown ­neighborhood, and Magellan, a Chicago-based developer that’s building a sleek glass-and-steel ­apartment tower near Loring Park.

Real estate prices in the Twin Cities are relatively inexpensive compared with some of the most high-profile markets, including Manhattan, Chicago and San Francisco, where there are fears that those markets are overheated and investors are experiencing “yield fatigue.”

Few apartment vacancies

With rents on the rise and rental vacancy rates at a near-record low of 2.8 percent, the Twin Cities was among the tightest rental markets in the nation last month, according to a quarterly survey of rental markets from Reis Inc., a New York-based real estate research firm. That was the seventh highest vacancy rate in the nation, just behind New York City, San Francisco and New Haven, Conn., which had the lowest vacancy rate (2.2 percent) in the nation.

“The apartment market has been on quite a tear over the last four years, with demand seemingly insatiable,” said Ryan Severino, a Reis senior economist. Nationwide, about 127,000 new apartments were delivered during 2013, he noted, which is in line with the long-term historical average and the highest annual total since 2009.

With buyers on the hunt and developers on a roll, property owners in the Twin Cities are sure to see the value of their holdings rise. Just how much depends on the strength of the recovery, and the depth of recent hiring gains.

If current conditions continue, apartment owners are expected be in the driver’s seat until at least 2017, according to the real estate firm Cassidy Turley. And that means extra attention for Twin Cities properties from outside investors for at least two more years.

“The fundamentals and dynamics of this marketplace are really attractive,” said Julie Lux, a Cassidy associate vice president. “That outstate money is still very aggressive.”

 

jmmoore@startribune.com • 612-673-7752 jim.buchta@startribune.com • 612-673-7376

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