By Brian Anderson
CoStar Analytics
November 23, 2022 | 9:00 AM
While the uncertain economic climate has weighed on consumer confidence and stymied household formation across nearly every major U.S. multifamily market over the past several quarters, demand for Twin Cities apartments has been exceptionally robust, representing a stark divergence from the nation at large.
Among the 50 largest markets nationally, Minneapolis is one of just five to witness net absorption, or the difference between move-ins and move-outs, outpace the 2017 to 2019 average in all three quarters of 2022, with the Twin Cities posting the most substantial year-to-date outperformance of any market (more than doubling the three-year pre-pandemic average). For comparison, the national index has seen year-to-date net absorption fall more than 40% below the three-year pre-pandemic average.
As of the third quarter, on the heels of three consecutive top-five all-time quarters of demand formation, Minneapolis’ trailing 12-month net absorption as a percentage of inventory ranks first among the 50 largest U.S. markets.
The Twin Cities’ current standing as one of the country’s most affordable major apartment markets has been a significant catalyst for apartment demand in the region. At the end of the third quarter, Minneapolis’ effective rent-to-income ratio reached an all-time low of 17.8%, making it the second most affordable metropolitan area of the nation’s 50 largest markets.
While the most recent data from the U.S. Census Bureau indicates that the Twin Cities lost roughly 1,900 residents, or about 0.1% of its population, between July 2020 and July 2021, Apartments.com search data suggests that Minneapolis’ pandemic-induced surge in affordability has helped lure out-of-state residents back into the metropolitan area over the past year. Notably, according to second-quarter search data for prospective residents searching for Twin Cities apartments via Apartments.com, nearly one-third of all searches came from an out-of-state location, up roughly 10% from the beginning of the pandemic.
Minneapolis’ affordability in the multifamily sector runs contrary to the lack of affordability in the single-family housing market, forcing high-income households to rent. According to Minneapolis Area of Realtors’ housing affordability index as of September, the Twin Cities’ single-family housing market was at its least affordable point of any month since it started tracking the data in 2004.
The impacts of this dire lack of single-family housing affordability on the Twin Cities’ apartment demand are also evident when looking at Minneapolis’ Apartments.com search data, which shows sequential growth in the share of searches from the 35-54 age cohort in the pandemic era.
While economic and demographic underpinnings have provided substantial demand-side tailwinds, unprecedented supply-side conditions are dragging on the sector’s fundamental performance.
Over the third quarter of 2022, more than 4,500 new apartment units went on line in Minneapolis-St. Paul, the region’s highest number of quarterly deliveries ever, outstripping third-quarter net absorption by nearly 2,000 units (the most significant supply/demand imbalance of any quarter on record).
From a national perspective, this glut of new supply catapulted the Twin Cities into the company of much bigger markets. In terms of quarterly production, the Twin Cities ranked third highest of any metropolitan area in the U.S., trailing only Dallas-Fort Worth and New York City.
The torrid pace of multifamily construction in Minneapolis-St. Paul is such that by the end of the third quarter, 2022 already ranked as the biggest year ever for net deliveries.
The unprecedented imbalance between supply and demand has inflated the area’s vacancy rate by roughly 1.1% year over year, hitting 6.7% by the end of the third quarter. That’s approximately 200 basis points higher than the region’s three-year pre-pandemic average. Among the 50 largest U.S. markets, only San Francisco saw a more substantial vacancy rate expansion relative to pre-pandemic levels.
The metropolitan area’s softening fundamental performance has weighed on landlords’ ability to push rents, with Minneapolis’ third-quarter annual rent growth of 2.5% distinctly lower than the 2017 to 2019 average. While annual rent growth decelerated quarter over quarter in every major market across the U.S., Minneapolis was one of just five markets to witness third-quarter annual rent growth fall below its three-year pre-pandemic average.
In fact, the Twin Cities’ trailing 12-month rent growth as of September ranks second lowest among the nation’s 50 largest markets, an improvement from the metropolitan area’s last-place ranking in each of the prior four quarters.
With one of the heaviest development pipelines in the country, CoStar’s Base Case scenario projects the Twin Cities to have one of the lowest average annual rent growth performances among all major markets over the five-year forecast period, as well.