Multifamily investors drawn to Twin Cities in Q2

The Twin Cities metro has become a more desirable place to own multifamily assets because of low vacancies and growing rents, according to a recent report from Michel Commercial Real Estate.

The metro has continued to attract outside investors, such as the Texas-based firm that bought the Beach Club Residences near Bde Maka Ska in Minneapolis or the New York company that bought The Bridges and The Knoll in Dinkytown — though some of the assets, maturing from COVID-era debts, have been selling for losses, according to the report.

Eight of the 11 Class A multifamily properties that sold in the last quarter were in either Minneapolis or St. Paul, the report shows. Heidi Addo, a vice president at Michel, said in an interview Monday that while she is not deeply familiar with all of the sales occurring in the urban core, many of the sellers have entered loss-mitigation mode.

“For many of these sales, they were from groups that were out of state and this deal was losing money for them on their spreadsheet and they needed to get rid of it, so they sold for a loss,” Addo said.

Two examples Addo points to include The Jax and The Donegan, both in St. Paul’s Lowertown, which were acquired by Altitude Capital and Nathan Landucci, respectively. The main driver, Addo said, is probably debt maturity. After five- to seven-year holds on sites that were bought using low, COVID-era interest rates, owners are facing decisions.

“They have to make a decision,” Addo said. “Am I going to have to raise capital and are my investors going to bring more capital to this deal where they’ve already taken a hit, or do we sell for a loss, cut our losses and just move on?”

This isn’t the case for all second-quarter transactions, according to Addo. The Borealis in Minneapolis’ North Loop was sold to L&B Realty Advisors for $46.25 million or $373,000 per unit, which is one of the largest sales in recent memory.

According to the report, the vacancy rate for multifamily properties in the metro sits at 6.9%, with the average asking rent at $1,560 per month.

Dylan Steman, a senior associate for Northmarq, said absorption in the metro has been strong, as the “supply cliff” becomes more and more evident. According to the report, The units under construction is at 5,828 units and the second quarter marked the lowest number of new deliveries in five years.

“It is submarket dependent, there’s certain markets that are going to see a little more persistent concessions and that’ll curb the rent growth and the net effect of rents in those markets,” he said. “Buyers are projecting north of 3% into (4%) on rent growth out of the gate which is pretty unique for our market. … Now, people are buying up a little bit more on the rent growth story.

Steman said he anticipates that some submarkets like the southwest will continue to see an influx of supply because of communities like Chanhassen, Victoria and Shakopee, which might cause lower rents in the short term, but over time, they will stabilize.

“We saw it happen in Maple Grove at one point in time too,” Steman said. “That’s stabilizing and that’s running its course right now and doing well.”