The first quarter of 2024 has shown little appetite for development, according to a new Northmarq report on the multifamily market, which has seen the lowest amount of permitting activity since 2017.
For the last six years, according to the report, developers in the Twin Cities metro have received permits for almost 3,000 units in the first quarter of each year. This year that number was 1,850 units.
Ted Bickel, the managing director for Northmarq, said this is because of the interest rate environment and says the places that have seen development happening are in the outer suburbs of the metro.
“I don’t think it’s surprising you’re seeing a significant drop in permitting in Minneapolis and St. Paul proper,” Bickel said in an interview with Finance & Commerce. “Likewise, if you drive around the metro, it’s fairly evident that you’re seeing more construction as you move out from the first and second ring suburbs. I think there’s a lot of unmet demand in some of those farther out suburbs.”
The reason these outer suburbs are seeing more development is a combination of where demand is at and the city governments putting forward some type of incentive to build in the area, Bickel said. These factors coupled together can give confidence to developers that a project can succeed, according to Bickel, despite the higher interest rates and construction costs.
There were 1,600 units that came online in the first quarter of 2024, according to the report. This is the beginning of a taper from previous years, Bickel said from the “sheer amount of supply that came online” between 2021 and 2023. The report said 6,000 units are expected to come online in 2024, a 31% decrease from what was delivered in 2023.
According to the report, average rent had been decreasing, and this year, rent increased 0.9% in the first quarter to an average of $1,529. Year-over-year rent growth was up 2.5%.
“I think if you look at the permitting going forward and where rent growth is today, we’re probably reaching somewhat of an equilibrium, which is healthy for the market,” Bickel said. “With respect to rent growth, it looks like, and I’m hearing this from investors as well, they are projecting out for rent growth, we’re going to be back at more of our historical norm of somewhere between 3% to 4%.”
Rent growth in 2024 is likely going to be 2.2%, reaching $1,550 in the remainder of 2024, the report says.
Transactions, in contrast to permits, are up from this time last year, the report said, and the median price-per-unit is $131,400, a jump of 13% from the same time 2023. There was also low vacancy in many of the buildings that sold. The vacancy rate for the metro was 5.2%, according to the report.
Bickel notes that institutional players have also entered the market, calling them “last movers” because they are the last to reenter during an investment cycle. This, he said, is positive for sellers because it increases the bid pool significantly.
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