SFR/Condo Development Issues & Value-Add Deals Michael Roessle – Market Economist January 12, 2018

Minneapolis SFR Permits Picking Up – Is it Enough?

Minneapolis Rent Growth vs Housing Price Growth

Homeownership Rebounding – Why Not More Condos?

Condo Development Litigation Changes Dearth of condo & townhome development due to increase in construction defect litigation Developers could be sued as much as a decade or more after project was completed Some changes to law were enacted in 2017: HOA’s need majority approval before instituting litigation/arbitration HOA’s must maintain and adhere to preventative maintenance plan Pre-litigation mediation requirement

Value-Add Deals Decreasing Affordable Housing Supply Sales of 1-3 Star complexes accounted for over 90% of the transactions and over 70% of the units in sales from 2015-2017 Many were value-add deals with investors renovating and raising rents to boost yields in what would otherwise be NOAH Increase in cost of land, labor and materials makes it financially unfeasible to build new affordable housing Employees are pushed further away from job centers, which could negatively impact Minnesota’s economic growth

Value-Add Examples The Concierge (698 units) – Richfield – Sold September 2015 Avg. Rent Pre-Sale: $775 Current Avg. Rent: $1,109 – 43% increase Grand Reserve – Goldman Sachs purchased the property from Invesco and one of the factors driving the high price per unit is that the large average unit size of nearly 1,350 SF. Vintage on Selby – Zurich North America purchased the building anchored by Whole Foods, in an all-cash deal. The $87 million price was for the entire complex as the price allocation for the residential portion was not yet disclosed. Bridges – Doran Companies sold this asset to TIAA-CREF as part of a two-property student housing portfolio (along with The Knoll in Dinkytown) for $93 million which translates to a “low 5” cap rate. Seasons Park – Affordable housing developer Aeon acquired the complex and plans to preserve the affordable rents and stabilize the rates. Residents must earn between 50-60% of the area’s median income. The Avenue Apartments (36 units) – Brooklyn Center – Sold August 2013 Avg. Rent Pre-Sale: $701 Current Avg. Rent: $868 – 24% increase Lonnie Adkins Court (77 units) – St. Paul – Sold December 2015 Avg. Rent Pre-Sale: $846 Current Avg. Rent: $962 – 14% increase