Twin Cities Apartment Market Conditions Winter 2014/2015 Brent Wittenberg – Marquette Advisors

Apartment Trends – Winter 2014/15 Twin Cities remains one of the strongest apartment markets in the U.S.! –Sustained low vacancy (<3.0% metro); –Steady rent growth; –Strong demand fundamentals. Deep & diverse economy. Job Growth! In-migration fueling demand. Increasing propensity to rent – economic & lifestyle factors. Favorable demographics (Millenials and Boomers) Millenials fueling demand. Preference to rent; all income levels. Empty nesters too, but smaller numbers to date. Marquette Advisors

One of Strongest Markets in U.S. Marquette Advisors Source: Marcus & Millichap

Apartment Trends – Winter 2014/15 One of most active new construction markets in U. S. –Expect 12,000+ new units Includes 3,500 in Downtown Mpls. –Major supply increases in Mpls creating competitive market. However, NOT a demand problem. Do NOT expect overbuilt submarkets. New product being absorbed; very limited use of concessions/incentives by apartment owners. –Healthy market experiencing absorption & temporary vacancy adjustment in active submarkets, expect market re-balance to 5.0% vacancy by late Marquette Advisors

Up to 12,000 new units ,000 new units

Marquette Advisors Rents & Vacancy by Submarket Marquette Advisors

Market Rents by Product Type

How many new apartments, and where? Marquette Advisors

New Apartments -- What are we building? A big splash with amenities. Design for single-person households Small, efficient units. Increasing popularity of Studio & “Alcove” floorplans Studio, Alcove, 1BR – 2/3+ of the unit mix today Fewer 2BRs – 20% today vs. 30% to 40% in past –Fits Millenial renter profile. Not necessarily empty nesters, with preference for larger 2+ BR floorplans. Marquette Advisors

Who is Renting? Demand for new, luxury product especially is driven by in-migration, job transfers. –Preference for well located, urban housing –Higher incomes, often less price sensitivity Also renters relocating/”upgrading” their housing w/in metro area. Limited cannibalization, however, of existing apartments. And older apartments able to quickly re-lease. Strong economy & job growth are keys to this. Millenials having major impact on market –Now are age years old Empty nesters too, but in smaller numbers Other groups: young families (including immigrants), but larger rental homes and townhomes, rather than apartments Marquette Advisors

Population Growth by Age Marquette Advisors Note growth in ages and groups. Front end of Millenials aging into their 30’s now. Where will they want to live? What about boomers/empty nesters? Marquette Advisors

Why rent? Increasing propensity to rent, rather than buy. Why? Lifestyle Factors –Prefer urban locations (more rental options here than ownership) –Maintenance-free –Smaller household (single renters opting for Studio or 1BR living)….may not make sense to buy a larger condo or house –Design of modern apartments supports socialization – amenities, gathering spaces. Important to Millenials. –MOBILITY! -- Renting provides mobility. Could I sell my home? Marquette Advisors

Why rent? Economic Factors –Mobility – resale issue and timing –Cost factors. Income-qualified, perhaps. But what about savings? –Down payment requirement. 20%? $80-100,000+ in many cases, especially urban and popular suburban markets. –Lack of savings – high debt levels –College debt – MN ranks 4 th highest nationally. 70% have “significant” college debt. Avg. nearly $40,000 per student. Marquette Advisors

Twin Cities Market Outlook Market Rate Apt Construction: –Construction: +12,000 new units –Demand: Market absorption 3,000+ units per year. –Expect temporary market vacancy adjustment, but demand generally in line with supply –Vacancy: : 3.8%-4.5% (predict will not exceed 5.0%) Demand fundamentals remain strong: –Strong economy: 30,000+ new jobs per year –Employee recruitment/retention key to success of economy. Requires attractive, appropriately designed and priced new housing! –Demographics: impact of Millenials. –Rent vs buy decision. Economics & lifestyle factors make renting attractive. –College enrollment trend. 440,000 in MN colleges vs. 350, years ago! –Avg. college graduate nearly $40k in debt – renting makes sense. Marquette Advisors

What’s Next Downtown/Uptown Minneapolis markets are hot. But what’s next? Not all can afford, or want to live in central cities. What about other locations? –Similar location fundamentals apply -- proximity to jobs, goods/services, dining/shopping, recreation, highway/transit access, walkability – “walk-score” Downtown St. Paul becoming more active. Light Rail Transit Corridors! Potential for SW-LRT What will Millenials want next? First wave of this group aging into early 30’s. What’s next after that Uptown apartment? Marquette Advisors