Roers Cos. sees opportunity in changing rental-housing market

As 2020 winds down, Roers Cos. is ramping up.

The Twin Cities-based apartment developer is responding to changing market conditions with a national expansion that has nearly tripled a development staff that will be tasked with doubling the number of projects it builds, especially rental housing for seniors and working-class renters.

"We saw an opportunity to expand our footprint to do more of that," said Shane LaFave, director of development for the company.

That expansion, which will be led by five new development associates, will include more competitive tax credit and historic redevelopment projects, which tend to be more complex than the market-rate projects that have been the company's bread and butter. Roers has no plans to abandon those kinds of projects.

This past week the company closed on the acquisition and financing to develop 200 market-rate apartments on nine parcels in West St. Paul and recently broke ground on projects in Woodbury and Lakeville. Another is expected soon in Fridley.

Projects are also in the works in Apple Valley, Burnsville, Bloomington and Maple Grove, and in Wisconsin, where the company is pursuing deals in Sun Prairie and Milwaukee. The company is partnering with a local developer in Milwaukee to convert a blighted and long-abandoned former Briggs & Stratton factory into income-restricted rentals and commercial. Beyond the Midwest, the newly expanded team is pursuing projects in Arizona, Colorado, Texas and Utah.

With many sectors of the economy still struggling and a glut of luxury rentals in the urban core and some inner-ring suburbs, Roers hopes to build a more diverse portfolio of rentals that are appealing to older and less wealthy renters in the Twin Cities where the rental market has become increasingly bifurcated.

"It's in our DNA as a company to double down in tough markets," said co-founder, Kent Roers. "We saw a lot of turbulence during the recession of 2009, but we took steps to diversify and grow then, too."

In downtown Minneapolis and St. Paul, where thousands of units have been built over the past several years, the average apartment vacancy rate is hovering near double-digits and rent concessions have become common. Most suburbs, however, are still suffering from a lack of rentals, especially income-restricted and market-rate rentals.

At the end of September the average vacancy rate across the metro was 3.6% for buildings not still being leased, an increase of more than a percentage point compared with last year, according to a third-quarter report from Marquette Advisors. The average rent in the metro was $1,293, slightly lower than the previous quarter but 2.2% higher than last year.

In downtown Minneapolis the average vacancy rate during the third quarter was 11.1%, including new projects that are still in the lease-up phase, and as of the end of September another 900 units are expected to hit the market in 2021.

Though the rental market across the metro is still one of the healthiest in the nation, the COVID-19 pandemic has created tremendous uncertainty within the industry, especially among investors who until this spring were lining up to buy completed projects.

Ted Abramson, senior vice president in CBRE's Minneapolis Multifamily Investment Properties office, said that after a summer lull apartment investors are now back, and demand for projects like the ones Roers develops is once again robust.

"Total volume is down," he said, "but the capital markets are still flush."

Abramson said Roers' focus on workforce housing in the suburbs is in line with demand.

"Those sectors are continuing to see growth," he said.

Roers marketing and leasing director, Amy Johnson, said that in the midst of economic uncertainty the company will expand its focus on the "missing middle," or working-class units that charge lower-than-market rents without the subsidies and low-income requirements of "affordable housing."

She said that making those projects affordable to build — and to rent — often means eliminating high-end amenities such as swimming pools and designing smaller floor plans or incorporating tax-increment financing (TIF) to offset the lower rents.

The company's first workforce housing market in the Twin Cities is the Axle Apartments in Fridley, where rents are expected to be at around 80% of the current market rate. The $51.5 million, 262-unit project, expected to open in mid-2022, is Roers' largest development to date.

Though the service sector and other industries that largely make up the "missing middle" have been hit hardest by the pandemic, most renters have been able to pay their rent, according to a Dec. 6 survey of more than 35,000 market-rate units managed by members of the Minnesota Multi-Housing Association.

However, that survey shows that the biggest declines in payment rates are among the most economically challenged renters. In older, more-affordable buildings in less-desirable areas, 84% of renters were able to make their rent, 9 percentage points lower than last year at the same time.

LaFave said that to serve a broader market the company will pursue more projects that are partly financed with tax credits. That will enable the company to pursue new markets with a goal of 10 or more projects a year, including in locations where the tax credit and bond awards are not as competitive as in Minnesota.

The previous development staff of three, including LaFave, principal partner Jeff Koch and developer Andy Bollig, was typically able to tackle only a half-dozen development projects every year.

One of the company's five new developers is based out of Madison, Wis., and will focus on tax-credit and historic redevelopment projects. Another will lead a Denver-based team focused on bringing more affordable housing to the region. The other three senior development associates will bring additional tax-credit expertise to the team.

"With tax-credit development, including both low-income and historic projects, the level of financial complexity, government regulation, and importance of timing synchronization is amplified," said LaFave. "So it takes the right kind of person and team to take on these kinds of projects."

Jim Buchta • 612-673-7376