Renter-Dominated Cities: A Growing and Expensive Trend?

Three separate stories were in the news recently: Renter-dominated urban centers, higher costs of construction, and record high prices for existing apartment buildings. What does that have to do with the Twin Cities?

Rented vs. Owned Housing

It shouldn’t be a total surprise for anyone involved in urban real estate or multi-family investment, but recent statistics point to a hot rental market in cities across the country, including Midwestern cities. Demographics are changing: In 21 American cities with at least 100,000 population, the number of rental households is greater than the number of owned households.

Rental percentages are trending higher in numerous other cities. Many of them are college towns, but not all. The new urban lifestyle is attractive, it seems, to an increasingly diverse group of households. Single professionals, young families, older executives and retirees all, for different reasons, see the appeal of urban lifestyles. For many, that means trading ownership for a lease. 

Moving Downtown

Downtown areas in cities large and small have become popular new neighborhoods for living, as well as for business. Based on information supplied by Pew Research Center, more than three million former homeowners chose to become renters in 2011. A decade earlier, the number was 2.5 million. And a large number of these new renters are heading for the inner city.

In mid-February, the sale of The Parkway, a 70-unit apartment building in downtown Minneapolis, was announced. The sales price was $6.5 million, or slightly more than $93,000 per unit. The buyer is TE Miller Development, LLC, based in Eden Prairie. The six-story building, built in 1917, is not considered a luxury complex, and there are few modern amenities, but it is in a popular location, and the building is at full occupancy. Reportedly, 50 of the studio, 1 and 2-bedroom apartments had already been updated prior to the sale.  

Average Costs

As of January 2017, the average apartment rent in Minneapolis is $1615 a month. Interestingly, the average rent in the city over the past six months has decreased by $83, or 4.9%, following a trend seen since the beginning of the year in other Midwest cities. In Minneapolis, rental rate vary by neighborhood, and Downtown rentals remain among the city’s highest-priced. The recent average for Loring Park apartments is listed at $1639.

There is a point in time, it seems, when trends converge. And, if the latest statistics are to be believed, this is one of those times for urban centers across the country. Investment in multiple-family apartments has been a strong trend since 2015, and with the pool of renter growing, it should remain positive during 2017 and into the future. Recent economic uncertainty had little effect on cap rates, and vacancies remain low in most areas. New apartment construction has not kept pace with increasing demand.

Going Up?

Costs continue to rise. Mortenson’s quarterly Construction Cost Index forecast an increase of 3-3.5 percent in Minneapolis building costs during 2017. That’s less than the four percent predicted for Milwaukee and Chicago, but it’s still a substantial increase. During 2016, the city saw a rise in costs of approximately 2.7 percent. The message? Now is the time to get going. Delaying a large-scale construction or renovation project will only add to the costs. If you’re planning to build, now may be the time. 

The projection echoes the experience of builders and developers across the country. High demand, spiraling prices and the need for affordable housing are problems for cities as diverse as Seattle, Denver, Austin and Boston. Minneapolis recently updated adopted its Affordable Housing Resolution in August 2016 to reflect an ongoing concern with affordability as it braces for an expected increase in rental apartments and a higher percentage of apartment dwellers in coming years.

Will Minneapolis ever become a renter-dominated city? Probably not, but renters will almost certainly play a big role, an important one, in the future of the city, particularly its popular urban neighborhoods.