There are indications that the multifamily market is beginning to recover from a choppy 2023 because of the interest rate plateau, according to a report on the first quarter of 2024 by Michel Commercial Real Estate.
Since the first quarter of 2023, transactions on multifamily assets have increased 37.5%, according to the report. Michel Vice President Heidi Addo said because interest rates were rising throughout 2023, there was uncertainty, but now, despite no decline in interest rates, investors are more confident because rates have held steady.
Interest rates have caused sale prices to drop, Addo said. Class A and Class C are down to $224,240 per unit and $105,696 per unit, respectively. Class B was up to $209,770 per unit, although Addo said this is because of a handful of outliers that were advertised as Class B, but really were straddling between A and B. These sold at a higher price than most Class B assets, bringing the price up.
“There was a brand-new build, the Emberwood Apartments, I would consider it an ‘A minus’ Class B property,” she said. “I would say those are a little better B product than the typical class B properties that we see.”
According to the report, average rent for a studio is around $1,108, a one-bedroom at $1,315, a two-bedroom at $1,667 and a three-bedroom at $2,141.
JLL Managing Director Josh Talberg said in an interview on Tuesday that the Twin Cities has a lot of demand for multifamily properties considering the limited supply that has been built over the last few years.
“The Twin Cities in general is fundamentally one of the strongest multifamily markets in the country right now,” Talberg said.
A third of the new units built in 2023, the report said, were located in the southwest suburbs. Addo said it’s not just the multifamily properties that are growing in the southwest, but the population too. Carver County, she said, is projected to have a population growth of 6.42% between 2023 and 2028.
The quantity of construction that had been happening is not expected to stay, Addo said, because of the price of building. There are 9,963 units under construction, which Addo said is half as many deliveries as last year.
“That’s just going to continue for the next few years until interest rates come down because it’s just too expensive to build and too risky,” she said.
The Federal Reserve Bank of Minneapolis released a report in March discussing how costs of operating multifamily properties have been increasing. This increase includes the costs of staffing, insurance as well as security. Addo said she has had to deal with these soaring costs, especially through insurance.
Addo said that previously, she could underwrite insurance for around $300 a unit. Now they are starting at $500 a unit because “insurance has gone up for every single property everywhere.”
As for security, Addo said problems have risen in certain parts of the Twin Cities core.
“Minneapolis and St. Paul are very dynamic cities, and they have neighborhoods that have higher and lower crime rates,” she said. “Those urban core locations are often the ones that have the most challenges with security and those are exorbitant expenses.”
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