Doubling Down in Downtown

The downtown Minneapolis apartment building boom could soon produce much higher vacancy rates, according to the recent Compass report.

So is it a good idea to be building more apartments in the Downtown East area of Minneapolis? That’s where some high-profile developers seem to be heading after concentrating on the North Loop and core downtown — though not everyone is so bullish.

“We’re not jumping into that game. … I would be concerned that there would be saturation,” said Bill Upshaw, president of lodging and residential at Minneapolis-based CSM, which owns the 43-unit Mill City Apartments at 625 Second St. N. and which developed the hotels at The Depot, at Third and Washington Avenues South.

Upshaw is even skeptical of the rosy predictions behind such reports as the Minneapolis Downtown Council’s 2025 Plan, which envisions doubling downtown’s residential population to 70,000 over 15 years.

The argument has been that the 20-something generation favors urban over suburban settings. But will they want to eventually raise children downtown? “I don’t think suburbia is dead,” Upshaw said.

The most recent Compass report from Bloomington-based Cushman & Wakefield/NorthMarq suggests that the downtown apartment market could become trickier — at least in the short-term: “Pockets like downtown Minneapolis could see vacancy rates jump to 8-10 percent in the next couple of years with all these units hitting at the same time.”

Minneapolis’ apartment market had a 2.2 percent vacancy rate for the first quarter of 2013, up from 1.9 percent a year before, according to the Compass report, which cited data from Marquette Advisors’ Apartment Trends report.

Out of more than 110 projects listed as proposed or in development in Finance & Commerce’s Twin Cities Apartment Development Tracker, nearly 70 are in Minneapolis — with development especially heavy in the downtown core and North Loop as well as in the city’s Uptown area.

But the new $975 million Minnesota Vikings stadium, set to break ground this fall, appears to have broken the dam when it comes to getting building projects going in the parking-lot wasteland of Downtown East.

Ryan Cos. US Inc. plans to acquire Star Tribune-owned land for a $400 million mixed-use development that will share parking with the new stadium. The Ryan project includes 300 to 350 multifamily units.

Then there’s developer Bob Lux and his Minneapolis-based Alatus, which are proposing a 320-unit apartment tower a block away from the Ryan project, at 301 Washington Ave. S.

“It’s going to attract new investment when you have about $1.5 billion spent on the new stadium and Ryan’s development,” Carl Runck, Minneapolis-based Alatus’ director of real estate development, said in an interview this week.

Four blocks east down South Third Street, Minneapolis-based Sherman Associates has been planning a development anchored by 150 market-rate apartments and a hotel with 110 rooms at the site of a vacant industrial building it acquired at 724 Third St. S.

While some local developers are becoming leery of more downtown apartment projects, out-of-state investors remain bullish and are scouting out parking lots and other potential downtown apartment building sites, said Luke Appert, a land broker at Cushman & Wakefield/NorthMarq.

“We’re working with three out-of-state groups that would do anything for a good site in Minneapolis,” Appert said. “Everybody’s talking about, ‘Who’s going to get caught?’

“In reality, each project seems to outperform the one before it,” he said. “And rents keep on going up. … Theoretically, it should get overbuilt. The million-dollar question is when.”

Downtown apartment complexes are already taking longer to lease, and developers and investors involved with new projects may want to plan for lease-ups as long as three years, said Tom Melchior, director of market research at Minneapolis-based CliftonLarsonAllen.

“It’s definitely going to be an overbuilt market for some time,” Melchior said.

But Mary Bujold, president of Minneapolis-based Maxfield Research, thinks Downtown East is a different story because Ryan’s vision also includes San Francisco-based Wells Fargo moving thousands of metro-area workers to 1.2 million square feet of office space the financial institution would own in the project. (Wells Fargo has yet to formally sign off on the deal.)

Some of the Wells Fargo workers, especially managers making more than $50,000 a year, might want to lease nearby apartments, and workers at other nearby employers such as Hennepin County Medical Center might also take a second look at living in the area, Bujold said.

Tony Barranco, vice president of development with Ryan, cautioned that Ryan has yet to make a final decision on whether to actually build apartments or condos in the area.

But Barranco also thinks that apartments in Ryan’s Downtown East project would be able to perform well even if overall supply outstrips demand.

“You have to have a remarkable story. You have to have remarkable amenities,” Barranco said.

Source: Finance and Commerce