2017 Update: Multi-Family Sales Continue While Home Market Tightens

2017 Update: Multi-Family Sales Continue While Home Market Tightens

The Multi-Family Home Market Continues to Grow For InvestorsEven though Minneapolis and Saint Paul continue to be hot spots for new apartment and condo development, and although home prices are expected to increase more than the national average, the Twin Cities rank among the least favorable cities nationwide for residential "fix and flip" investors, according to a new ranking of 150 American cities by Wallet Hub. Tied with San Antonio, Texas, Minneapolis and Saint Paul have among the lowest percentage of fix and flip activity in the country.

On the surface, that seems odd.

Remodeling for Profit 

A similar kind of remodel activity in the multi-family market has led to a hot market for commercial investors, who continue to buy up and renovate older buildings, warehouses and office complexes. The demand for new rental units and condominiums in the urban cores of both cities, as well as in close-in suburban communities, has never been stronger. Rent continues to increase, causing worries about the lack of affordable housing, and current projections call for the trend to continue. 

Value-Add renovations continue to push condo sales figures higher as well, and new condominium high rises are more popular than ever. Current and projected supply, at least for the short term, does not meet the demand. 

With the rising rents, positive ROI for large-scale renovations of Class B and C properties exceeded expectations over the past 12 months, spurring continued interest, both for downtown and close-in remodel projects. New apartment development continues apace, with units available in 2017 expected to top 5,000. In 2016, only 3,290 units were delivered, lower than the forecast.

Western Minneapolis suburbs constitute a vibrant market; renovations of older buildings have changed the face of formerly industrial or commercial areas, and both large and small mixed-use developments bring new convenience to existing neighborhoods. This growth trend is expected to continue.

Changing Demographics

Interestingly, the largest force in the local rental market, according to a Colliers International Research Report, is the 55+ age group. Demand for urban rentals by this age group has grown by more than 20 percent over the last five years, with the Millennial (20–34) market in second place, showing 4.9 percent growth during the same period. Minneapolis was ranked by Forbes Magazine as one of the top 10 cities for Millennials, so the picture for rentals is expected to remain rosy. 

Millennials and Baby Boomers are driving the market for home and condominium sales as well.

A report released in January by the University of St. Thomas Shenehon Center for Real Estate forecast a five percent jump in median home sales prices during 2017, fueled by continuing low supply. Other predictions set the percentage increase even higher. The year-over-year appreciation rate nationally is expected to only be about two percent, according to the National Association of Realtors®.

Additionally, significantly fewer homes are on the market in the Twin Cities at any given time than there were prior to the housing crisis. Approximately 60,000 homes were sold in the Twin Cities in 2016, and the expectation is that sales will be about the same this year. New construction is up, and that may help to normalize the market. Most analysts see the appreciation rate slowing by the end of the year, deemed to be a good thing.

Looking to the Future

The real estate climate in the Twin Cities is affected by a variety of different factors, and these are interesting times for commercial investment, renovation and value-add development. 

While single family rentals constitute a viable way to build a portfolio and fix and flip was (and still may be) a good way to begin, all signs point in a different direction currently in Minneapolis and Saint Paul. "Fix, hold and rent" is the smart new language of investment in these two cities. 

Just look at the strength of the Minneapolis market: A one percent population growth each year for the past five, added new demand for rentals, an occupancy rate that hovers around 97.6 percent, and the highest percentage rental growth rate (4.8 percent) in the Midwest.

This is the face of development in the Twin Cities.

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