Minneapolis-based Greco Real Estate Development recently started construction on a 171-unit apartment project at 2900 Lyndale Ave. S. in south Minneapolis. The site previously sat idle for years. (Staff photo: Bill Klotz)
Developer Arnie Gregory has been one of the busiest players in the current Twin Cities apartment boom.
His company, Minneapolis-based Greco Real Estate Development, just started construction on its latest project, a 171-unit market rate apartment complex along the Midtown Greenway in south Minneapolis expected to come on line in 2014.
Yet, in a business driven by what’s next, Gregory is calling time out. Citing the large number of apartments under development, he says he’s not looking for additional projects right now.
“We are not chasing any deals,” he said. “I don’t foresee that we will be in the near term. I think we’re going to finish up what we’ve got and let this all play out.”
Call it a warning signal about the state of an apartment market that has stood out in an otherwise sluggish real estate development scene. In some corners of downtown Minneapolis, construction cranes seem to be everywhere. Finance & Commerce is tracking more than 4,000 apartments under construction within the city limits of Minneapolis and more than 16,000 units either under construction or proposed across the Twin Cities.
But history suggests the game is about to change. Developers will struggle to land financing and some planned projects will be canceled. Meanwhile, other developers will scramble to fill new projects as demand slows for units with rents of $2 or more per square foot, which would translate into $2,000 per month for a 1,000-square-foot unit.
The key question is how fast this change will take hold.
“I think that the next round of buildings that’s going to be opening will do well. Those that are going to be opening in mid-2103, I think we’re going to see leaseups start to slow,” said Tom Melchior, director of market research for Minneapolis-based CliftonLarsonAllen. “2014 is probably going to be the real problematic year. You’re going to see an overbuilt market for a couple of years.”
While developers continue to propose apartment projects at a feverish clip, market observers are increasingly wary about the depth of the demand for new units.
For Gregory, whose company has developed the 216-unit Flux in the Uptown area of south Minneapolis, the 120-unit Copham in downtown Minneapolis and the soon-to-open 116-unit ElseWarehouse, it’s clearly time to pull back the reins.
“I think first and foremost it’s driven by all of the product that’s in the pipeline and coming online,” Gregory said. “There’s going to be a lot of people delivering over the course of the next 12 to 24 months.”
Gregory is not the only developer cautiously watching the market.
“We may not necessarily know we’ve gone over the cliff until we’ve gone over the cliff,” said George Sherman, president and owner of Minneapolis-based Sherman Associates.
Sherman Associates is building the 180-unit Longfellow Station in south Minneapolis and the 178-unit West Side Flats in St. Paul. He’s also planning 140 units at the former Reserve condo site in the North Loop area of downtown Minneapolis and 86 to 89 units at the vintage Rayette Building in downtown St. Paul.
Sherman said that the vast majority of local apartments are on solid footing. But he questions the depth of demand for new high-end units charging more than $2 per square foot in rent.
“How many more projects can get done before there is a tipping point on that upper end market?” Sherman said. “When you do the numbers, $1,800 to $2,500 a month of rent is pushing what a large amount of people can afford to pay.”
Sherman, an industry veteran, takes a long-haul view of the market.
“Clearly we are in a building boom right now,” Sherman said. “We’re producing significantly more apartments than we have historically done. Where I think we have this tremendous exposure is on the upper end of the market rate spectrum.”
Sherman believes that this boom is being driven by the ongoing turmoil in the housing market and attractive financing terms for developers: “I think it has to do with the for-sale market shutting down and low interest rates.”
But it can’t last forever, Sherman said.
“The demand is going to slow down and in two years rates will not support this kind of development,” he said.
Citing the large number of apartments under development, developer Arnie Gregory says he’s not looking for additional projects right now. This June photo shows Gregory at the TowerLight senior housing project, which was under construction in St. Louis Park. (FILE PHOTO: BILL KLOTZ)
Same old market?
There are competing schools of thought about the current apartment boom. Some think that changes in the economy and weakness of the housing market have fundamentally changed the dynamics of the market, creating a new generation of people who would rather rent than buy a home.
Other observers argue that real estate remains a cyclical business with boom-and-bust cycles destined to repeat themselves. As vacancy rates fall, developers start building units. But at some point, too many developers are in the game and the market becomes overbuilt. Development stalls as people wait for the existing inventory to fill up.
Ryan Severino, senior economist with New York-based research firm REIS Inc., said that after more than two strong years for the apartment business, numbers show the boom is slowing down.
“We’re seeing barely any movement in vacancy; rent growth has started to decelerate,” Severino said. “It had been on a really good tear for two and a half years. … 2013 and beyond is where it starts to get interesting.”
The third-quarter market report from REIS found an average vacancy rate of 4.6 percent across the nation. REIS reported a vacancy rate of 2.4 percent for the Minneapolis-St. Paul market, one of the lowest rates in the country.
But the report from REIS cautions: “The third quarter’s rate of absorption is the slowest pace since the recovery began in the first quarter of 2010, and represents less than half the quarterly average rate of about 50,000 units that the sector enjoyed in 2010 and 2011.”
After enjoying a strong rebound, the question is what will drive demand for additional units.
“The economy and the job market are still pretty weak,” Severino said. “A good number of the jobs being created are lower wage jobs. … Until we see better jobs being created … it’s going to be a little bit of a challenge. There’s just not a lot of really strong income growth right now.”
Local apartment reports are also flashing yellow for vacancy rate and absorption trends.
A quarterly survey by Minneapolis-based Marquette Advisors reported a third-quarter vacancy rate of 2.7 percent across the Twin Cities. While still low, it did mark an uptick from the 2.3 percent vacancy rate reported a year ago.
During the first nine months of 2012, Marquette Advisors tallied absorption of 1,164 units across the metro. That paled in comparison to the absorption of 3,029 units during the first nine months of 2011.
The Marquette Advisors reported noted: “The pace of job creation has been unsteady over the past several months.”
The troubling jobs trend also is reflected in surveys of vacant positions conducted twice a year by the state of Minnesota. A second-quarter survey of employers found an increase in open jobs compared with a year ago, but 42 percent of openings were part time and half offered pay of less than $11.06 an hour.
Place your bets
So far, lenders have continued to finance new multifamily deals.
“Apartments have always been speculative,” CliftonLarsonAllen’s Melchior said. “You don’t wait for people to rent before you build the building. … There’s money out there that wants to be put to use. Where else are you going to invest it? … The darling of the real estate industry right now is rental housing.”
Some skeptics thought that two luxury apartment towers proposed for downtown Minneapolis might never move forward. But this fall, Chicago-based Magellan Development Group started construction on a 354-unit project near Loring Park and Minnetonka-based Opus Development Corp. began The Nic on Fifth, a 253-unit project in the heart of downtown Minneapolis. The Opus project, however, is about 25 percent smaller than originally envisioned. When plans were first floated last year, the Opus tower called for 330 apartments.
Most observers agree that not every proposed apartment project will be built. Some have already been scuttled.
Minneapolis-based nonprofit Artspace Projects had planned a 59-unit affordable apartment project in downtown Minneapolis on a vacant parcel of land owned by the city of Minneapolis. But last summer, Artspace quietly scrapped plans for the project, at 800 Washington Ave. S., saying it could not attract enough financing for the project.
As they try to read the apartment market, many developers are reminded of the condo boom of 2004-2006, when they competed to build for-sale urban units.
As the market began to shift, many condo projects were scrapped as developers were unable to pre-sell units and secure financing. Some developers lost money; others lost sites to foreclosure. Many vacant sites remain undeveloped. Some of those are back in circulation as apartment sites.
Some believe it may be time for a reprise. “If I was a developer out there, I would start a condo project right now,” Melchior said. “There’s virtually no product left.”
That’s exactly what developer Jim Stanton of Coon Rapids-based Shamrock Development is doing in downtown Minneapolis. Construction is now under way on his Stonebridge Lofts, a 166-unit condo building near the Guthrie Theater that’s slated for completion in January 2014.
Greco’s Arnie Gregory, meanwhile, is surveying the landscape near his latest apartment project under construction at 2900 Lyndale Ave. S.
Just a block away, the 198-unit Track 29 Apartments is slated to open in spring, offering “New York-style” two-story duplex units. A couple blocks to the west is Elan Uptown, a project ultimately slated for 591 units on the former Bennett Lumber site. Greystar, a large national apartment player based in Charleston, S.C., is building 203 units, the first phase of Elan Uptown, also aimed at a spring opening.
“We’re all going to compete with each other,” Gregory said. “Everybody’s going to need about the same rent; it’s all new [construction]. It’s all going to come down to marketing, management and branding.”
In tough market, apartments stand out
2012 continued to be a hot year for apartment development in the Twin Cities. Below are notable projects that opened during the year along with a list of key projects that are under construction. For judging the health of the market going forward, we’ve provided some key proposed projects to watch. For a complete overview of the market, check out our Apartment Development Tracker at finance-commerce.com.
Flux, 2838 Fremont Ave. S., Minneapolis, 216 units: An upscale Greco project in the Uptown area of south Minneapolis, along the Midtown Greenway.
The city of St. Paul developed The Lofts at Farmers Market, a long-delayed project in the Lowertown area of the city. (Staff photo: Bill Klotz)
Genesee, 8055 Penn Ave. S., Bloomington, 234 units: Bloomington-based StuartCo brought rentals to the intersection of Penn Avenue South and American Boulevard West, long planned for redevelopment.
Stadium Village Flats, 850 Washington Ave. SE, Minneapolis, 120 units: Minnetonka-based Opus Development Corp. delivered a mixed-use project reflecting the trend of high-end apartments catering to University of Minnesota students.
Soltvå, 701 Second St. N., Minneapolis, 100 units: The North Loop area of Minneapolis is one of the most crowded areas for new apartment development. The team of Solhem LLC and TE Miller Development completed this project last summer.
The Lofts at Farmers Market, 260 E. Fifth St., St. Paul, 58 units: Developed by the city of St. Paul, the long-delayed project was finally completed in the Lowertown area of downtown St. Paul.
Loring Park Tower, 1369 Spruce Place, Minneapolis, 354 units: Chicago-based Magellan Development Group is bringing a “Windy City”-scale project to Minneapolis with this 36-story luxury tower. The project does not yet have a name.
A Whole Foods grocery store is a key feature in the 222 Hennepin project under way on the site of a former car dealership in downtown Minneapolis. (Staff photo: Bill Klotz)
222 Hennepin, 222 Hennepin Ave., Minneapolis, 286 units: The Excelsior Group and Ryan Companies US Inc. are developing a former car dealership site in the North Loop area of Minneapolis. The project will include a new Whole Foods grocery store.
The Nic on Fifth, 415-427 Nicollet Mall, Minneapolis, 253 units: Minnetonka-based Opus Development Corp. has started work on a luxury 26-story tower in the heart of downtown Minneapolis.
The Penfield, 101 E. 10th St., St. Paul, 254 units: Another condo deal that never happened. The city of St. Paul is developing the project, which will include a new Lunds grocery store.
Elan Uptown, Bennett Lumber site, Minneapolis, 203 units: The Uptown area of south Minneapolis is another draw for developers. South Carolina-based Greystar Real Estate Partners is working on the first phase (203 units); plans for the total site call for 591 units.
PROJECTS TO WATCH:
Skye at Arbor Lakes, Lakeview Drive & Arbor Lakes Parkway, Maple Grove, 440 units: Florida-based LeCesse Development Corp. is hoping to start construction on the first phase (262 units) next spring.
1 Southdale Place, Southdale Center, Edina, 232 units: Southdale owner Simon Property Group and Bloomington-based StuartCo plan to add luxury apartments on an overflow parking lot at the shopping mall. Construction is set to begin in May 2013.
UTEC site, 1313 Fifth St. SE, Minneapolis, 317 units: Chicago-based Gem Realty Capital Inc. is proposing to raze the University Technology Enterprise Center (UTEC) in the Dinkytown area of Minneapolis near the University of Minnesota campus.
Currie Park Lofts, 515 15th Ave. S., Minneapolis, 259 units: Minneapolis-based Fine Associates has been pursuing this large project for years. The developer has to move a vintage saloon off the site, but is hoping to break ground next spring.
Superior Plating, 315 First Ave. NE., Minneapolis, 600 units: There has long been talk of redeveloping this polluted industrial site which could accommodate a large project. But plans remain unclear.
Source: Finance & Commerce