• Weak job market continues to impair demand for apartments

• Low interest rates luring renters into the owner-occupied residential market 

• Developers see market softness as temporary; continue to build new product in anticipation of rebound 

METRO MARKET OVERVIEW  Ongoing weakness in the job market, lower interest rates and an increase in new supply continue to put upward pressure on the vacancy rate in the Twin Cities apartment market.  Vacancy is at 6.6%, it’s highest mark in a decade and triple the year-end 2001 figure. Average rents rose $1 to $841 per unit. Softness is most apparent for upper end properties, including many of the newer developments in upscale suburbs such as Plymouth and Eden Prairie. Vacancy rates in selected areas can be as high as 20%, and lease-up times for many new luxury projects are growing lengthier. Many apartment landlords are offering significant concessions such as one to three months’ free rent and free garage parking to attract tenants. Rent rollbacks have also occurred in a few selected projects. 

Construction Continues Due To Long Delivery Timeline
New development added approximately 3,000 new units to the market in 2002. Building new product at a time of market softness may seem like an economic contradiction. But planning for many of the projects coming online today began several years ago, when the market was straining to meet demand. Developers are proceeding with their projects on the assumption that the current downturn is only temporary. 

Meanwhile, property owners are taking advantage of lower interest rates and refinancing to reduce their fixed costs. But lower interest rates are also luring renters out of their apartments and into new, owner-occupied housing as well. Home builders are staying busy, as the number of residential permits for new homes in the Twin Cities is just 2% below the pace of 2001. Planned units are actually higher than in 2002, reflecting an increase in construction of attached housing according to The Builders Association of the Twin Cities.

Even though both rental and owner-occupied prices have spiked since the late 1990s, the Twin Cities is still a bargain for homes compared to many other major metropolitan areas, according to a study by the Twin Cities Business Journal and its parent company, American Business Journals. The study ranked the Twin Cities 32nd among metropolitan areas for housing costs. 

Highlights

• Reviews are anything but mixed on mixed-use development projects in the Twin Cities. Cities overwhelmingly favor new development that includes housing – both for-sale and rental -- retail and commercial buildings. At least a dozen substantial mixed use projects are underway in the Twin Cities. Projects range from the “urban villages” such as The Landing that are springing up in downtown St. Paul to the elegant Excelsior and Grand town center redevelopment project in St. Louis Park. Market-rate rental properties are a key part of many of these projects. Among the most significant mixed-use developments now underway or planned are: 

  • A 1,080-acre development in Blaine called The Lakes that will include 4,000 new homes in the northwest suburb. Proposed by Gorham Builders, Hans Hagen Homes and Tony Emmerich of Emmerich Development Corporation, the project would include a wide variety of housing types along with retail and industrial space. A chain of four man-made lakes navigable by canoe and kayak would also be created. The Metropolitan Council is set to consider the plan in early 2003. 

  • Eden Prairie-based developer Hartford Group Inc. has planted the seeds for a new, $250-million mixed-use The Legacy of Maplewood development on an 81-acre farm site in Maplewood. The project will include both apartments and for-sale housing, along with restaurants, office and retail space and perhaps a senior health care facility. Initial plans call for a mix of about 526 housing units and 56,000 square feet of restaurant space. Hartford Group is also active in a number of other mixed-use developments in the Twin Cities, including The Legacy of Apple Valley, The Legacy of Oakdale, and The Legacy of Inver Grove Heights. 

  • The City of New Hope is working with Edina-based Brookstone Inc. to create a 40-acre town center that would include both retail and 700 to 1,000 new housing units. Brookstone and the city are working to redevelop the New Hope City Center area, at the intersection of Winnetka Avenue and 42nd Avenue North. 

  • A former liquor warehouse along University Avenue in St. Paul’s Midway District would be redeveloped into a mixed-use project including 400 new apartments, under a proposal submitted by MetroPlains Development to the City of St. Paul. Called “University Village,” the project would also include 25,000 to 50,000 square feet of retail space, a 750-stall parking ramp and eventually a light rail transit station. MetroPlains wants to acquire three brick buildings totaling about 350,000 square feet of space from St. Paul-based Johnson Bros. Wholesale Liquor, which relocated from the buildings to a new St. Paul home last year. The developer hopes to break ground in late 2003 or early 2004. 

  • Also along University Avenue in St. Paul, ground was broken in November on a 420-unit apartment and condominium project on a site west of Highway 280 near Emerald Avenue. St. Paul-based Wellington Management is leading the development of the project. 

  • Lease-up is well underway on the 350 units of new apartments included in the first phase of the Excelsior & Grand redevelopment project on Excelsior Boulevard in St. Louis Park. TOLD Development Company will also open the first phase of retail space in the multi-block, mixed-use project this coming spring. 

  • Apache Plaza in the Village of St. Anthony is slated to be demolished and replaced with a $75 million to $100 million mixed-use project that includes 175 units of market rate rental units and 150 units of senior rental units. New Brighton-based Pratt-Ordway Properties, the project developer, hopes to raze the mall and begin construction in 2003. Dominium Development and Acquisition is the housing partner for the project. Apache Plaza is one of the oldest shopping malls in the Twin Cities. It’s only remaining anchor tenant is a Herberger’s department store. 

  • Phase one of a $200 million mixed-use project in Burnsville is under construction with 108 units of apartments, along with owner-occupied housing and retail space. Called Grand Market Place, the project is designed as a European-style village situated within a larger project called Burnsville’s Heart of the City. The housing and retail space is being built by developers Sherman & Associates of Minneapolis and Burnsville resident Ron Achterkirch.

• The City of Arden Hills is working with a development group led by Dallas-based Centex Homes to redevelop a portion of the 2,370 acre Twin Cities Army Ammunition Plant in the city. The city is promoting a large, mixed-use development for some of the 774 acres of land that the Army no longer needs for its purposes. Additional members of the development team are Blaine-based Glenn Rehbein Companies and Minneapolis-based Ryan Companies U.S. Inc. 

• Four local developers are vying for a chance to develop a 200-unit multifamily housing project in downtown St. Paul. The City of St. Paul controls the 1.5 acre site in the North Quadrant area of downtown. The city is expected to make a decision on the developers’ proposals in early 2003. 

• A new luxury apartment complex is underway in Edina. The 100-unit Cornelia Place Apartment Homes, at the intersection of 65th Street and Valley View Road, is scheduled to open in June 2003. The four-story building will feature units ranging in size from 825 to 2,200 square feet. Steve Scott Development and The Craig Company are co-developers; the owner is Rovick Realty.

The Outlook  
Relatively low rental rates for apartments constrained the growth of the apartment market in the Twin Cities until recently, along with high property taxes and land costs. Developers only became active in building new supply following several years of substantial growth in rental rates and a significant lowering of the property tax rate on apartments beginning in 2001. Pent-up demand for new apartments absorbed the first wave of development that arrived in 2000 and 2001. Now demand has slowed along with the economy. Many believe that as the employment market recovers in the next one to two years, so will the market for apartments at all income levels.