New residential development along the Midtown Greenway. In a couple weeks, the parking lot at bottom right will be torn up to make way for a new office building–which already has an anchor tenant.
Minneapolis is hot! The Metropolitan Council recently noted that we popped back up above 400,000 residents after adding almost 9,000 people between 2012 and 2013. The area along the Midtown Greenway has been completely transformed in the past decade–eleven separate projects, ten of which are residential, have been built along its Uptown stretch since 2004. There are residential towers sprouting in Downtown Minneapolis, Loring Park, and the University of Minnesota area.
Put another way, at any given point in 2013, on average there were thousands of more people living in Minneapolis than just a few months prior.
And there are tensions! At neighborhood meetings, and in CityPages listicle comment sections, and on Facebook pages, and on Facebook pages satirizing Facebook pages, and elsewhere. This new rental stock is no vintage 1980s Elliot Park studio apartment–it’s amenity-rich, it has high-end finishes, and it’s generally in very visible locations. It’s also more expensive than most existing rental stock, for reasons outlined below.
What’s getting built?
LPM Apartments
The one bedroom units at LPM Apartments, a 36 story tower opening soon down the street from my own granite-less one bedroom, start at $1700/month. Prices vary between projects, though. The new office-to-residential conversion in the Soo Line Building in Downtown Minneapolis has large studios starting at $1100/month, and Track 29 in Uptown has one bedrooms priced a little lower than LPM Apartments, with the cheapest renting for $1430/month.
Average rents have certainly increased, in part due to the addition of thousands of newer, more expensive units but also because even in the face of this building boom, rental vacancies are historically low. In other words, there’s demand. People want to live in Minneapolis. These new buildings aren’t technically overpriced–because they’re being occupied. If they were overpriced, they wouldn’t be filling up. Some anecdata: Last week while putting money on my laundry card in the office of my own mid-market apartment building, I found out that a new unit with a better view had just opened up, so I quickly ran upstairs to grab a check for the deposit. Turned it in and put my stuff in the wash. By the time I got my laundry out of the dryer, my current unit was taken by someone else. True story.
Who’s renting these places?
So who can possibly afford these apartments? There are less than 100 Daytons in the whole state!
Well, it actually makes quite a bit of sense. The Minneapolis-St. Paul metropolitan area is one of the wealthier ones in the country, but it’s also one of the more affordable. People in San Francisco or Manhattan would die to pay $1600/month for a one bedroom apartment. And much of our employment is made up of corporate, professional jobs. There are 18 Fortune 500 companies headquartered here–so we have about 1% of the total population but 3.6% of the biggest public companies. Several of these companies–Target, US Bank, Xcel Energy, Ameriprise, Thrivent, and Valspar–are located right in Downtown Minneapolis. Also, we’ve got lots of hospitals and their employees. And lots of lawyers. Thousands of lawyers.
Knowing this, it’s not really that hard to imagine situations in which many thousands of people can cobble together $1600/month to pay rent–in particular if you don’t have a car, though word on the street is that most of these folks do. The tens of thousands of Target, US Bank, and Xcel Energy corporate employees in Downtown Minneapolis do okay. Two 25 year old roommates a couple years into working at Target can easily make $100,000 together, leaving something like $5,000 or $6,000 per month, after taxes, to manage to pay rent. Plus, I hear that of those thousands of lawyers, many of them will tend to marry each other, which creates even higher wealth households.
Locations of Downtown Minneapolis Fortune 500 companies.
I’m not arguing that there are rich people growing on trees in Gold Medal Park, but that it’s important to keep in mind that in our relatively prosperous and stable metropolitan area of 3.5 million people, it’s pretty easy to figure out where ten thousand or so financially stable people may come from.
What’s with these rents?
In the current boom, the actual cost of construction in relation to advertised rents is a woefully undercovered topic. Based on hundreds of hours of message board reading, comment section perusing, and actual real life conversations in the past couple years, I’ve noticed that there’s a commonly-held misconception about the costs of new residential development.
A $1600/month one bedroom apartment doesn’t cost $800/month because of granite countertops and a dog washing station. It costs $1600/month because it’s expensive to buy a half block of land in Uptown or Downtown Minneapolis, tear a building down, dig a two story hole, pour three stories of concrete, and then build 250 apartments on top of it. The amenities and finishes are a relatively small part of the overall project cost. According to an estimate I got from a developer involved in several Uptown area projects, if you were to build a residential building with no common amenities and less costly finishes–my word was spartan–the most you could really expect to cut out of a project in today’s market is about 10% or 15% of the overall project cost.
In that scenario, a developer builds 250 units with no granite countertops and no dog washing station, and still needs to rent that one bedroom for $1400/month to break even. That’s not doable in our market–there’s plenty of comparable existing stock for considerably cheaper. The extra amenities are what makes new construction financially viable.
A different local developer gave me a general breakdown of project costs for your average Minneapolis residential infill development, and he mentioned a similar estimate for amenities and finishes but also broke out structured underground parking separately. Surprising no regular streets.mn reader but maybe some irregular readers, he pegged that at about a fourth of the overall project cost. Not insignificant.
Surprising to me personally was the revelation that there are, in fact, many people moving to Minneapolis from the coasts or Chicago who are excited to be in a city where it’s relatively affordable to own a car–and there’s an expectation that their new apartment will have structured parking.
What’s Next?
The theory is that overall, new supply keeps rents lower, at least lower than they would be without that new supply. However, it’s important to note that this is more of a macro process. Adding 1,000 units to the market soaks up 1,000 units of demand in the market generally. It can work in the opposite direction in specific submarkets. If you live on an intersection where there were previously two vacant, weeded lots, and two buildings are built on those lots with a restaurant in one and a brewpub in the other, it’s likely that your area will get more desirable, more people will want to live there, and your rent will probably go up. But to be clear: More housing will decrease rents in the overall market as demand is satisfied.
And there are tens of vacant lots being redeveloped in specific areas. Just when it seemed like the residential boom was slowing down a bit, Mortenson finally broke ground on a 30 story apartment tower at Marquette and 4th Street last month, and Alatus announced plans for a residential tower in St. Anthony Main last week. There’s some evidence that vacancies in the Downtown Minneapolis submarket are starting to rise. Mayor Hodges wants 500,000 Minneapolitans in the near future. There are lots of vacant houses and vacant lots all over the city, especially on the Northside.
But most maybe importantly, gas is still more expensive than it was in the 90s and the Chili’s off the freeway exit is still kind of boring.
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Note: One thing we should all do is stop using the word “luxury” to describe things that we’re vaguely familiar with or just heard about in passing. Luxury is a subjective word that has different meanings depending on who you’re talking to, and like some other words, it has lost a certain amount of meaning over the past decade. It’s started to sound silly most of the time. Do not do developers’ advertising for them. They have people to do that.