West Coast investor on apartment buying spree in Minneapolis

Higher interest rates are stifling commercial real estate values — and sales — but a West Coast investor is still on a buying spree in Minneapolis.

Kirkland, Wash.-based Weidner Apartment Homes has spent more than $250 million on apartment buildings in Minneapolis so far this year. Last week, the company paid $111 million for eight apartment buildings in the Uptown neighborhood of Minneapolis that have a combined estimated market value of about $163 million.

That deal includes a pair of mixed-use buildings formerly known as the Elan and the Miles Uptown apartments situated on three blocks along the Midtown Greenway, a 5.5-mile bike and pedestrian trail built on a former rail bed.

Weidner merged the communities and renamed the 590-unit property Inspire Apartments. That multi-building complex, which includes 910 square feet of retail space, is two blocks north of West Lake Street

Weidner's Uptown portfolio alone includes 918 units, including the nearby Daymark Uptown Apartments. The company now owns and manages nearly 5,700 apartments throughout Minnesota and is the 15th largest property owner and manager in the country.

Earlier this month, Weidner paid $70 million cash for the Nic on Fifth, a 253-unit luxury apartment tower in downtown Minneapolis. And in June, the company paid $74 million for the 36-story LPM Apartments tower near Loring Park.

Weidner has also made significant investments in new rental buildings. Most recently, the company partnered with Minneapolis-based Ryan Companies on Fourth & Park, a 25-story apartment tower by U.S. Bank Stadium that's nearing completion.

Greg Cerbana, vice president of public relations and government affairs at Weidner, said favorable prices partly fueled the company's recent acquisitions.

"The current focus is on acquiring buildings in markets we are already active throughout in order to leverage the teams we have on the ground in those areas," he said. "The price per unit that we paid for these buildings was extremely attractive and something that would be hard to find in other markets given the quality and location of the buildings."

Cerbana said while there still might be some headwinds in the housing market both nationally and especially locally, as a long-term owner, the company is confident in the future prospects for its local investments.

Still, Cerbana said, the company has no plans for additional development in the metro.

Weidner's most recent purchases come at a time when sales — and prices — for commercial buildings are declining, especially in urban areas across the country. Though apartment vacancy rates in the Twin Cities are generally more favorable to building owners, and rents in most areas are stable or on the rise, apartment prices are declining after rising to record highs during the pandemic.

But higher interest rates and a lack of capital has reduced investor buyer power as well as confidence. Abe Appert, executive vice president at CBRE, said interest rates are now 300 basis points higher than 18 months ago.

"That has had an impact on value," he said. "There's been a significant price adjustment/correction in the last 18 months."

Appert, who represented Greystar Real Estate in the recent Uptown sale, said prices are resetting nationally, not just in the Twin Cities. Here, multi-family buildings are trading for roughly 20-25% discounts but in some cases, as much as 40% reductions from 2022 when prices peaked.

Four years ago, for example, the Nic on Fifth had an estimated market value, according to Hennepin County property records, of more than $100 million. Earlier this month, Weidner paid $70 million.

Appert said transaction volume is down considerably after peaking in 2021. In 2022, building sales were down 40% from the year before, and he expects another 50% decline this year.

All of this turbulence and uncertainty, however, doesn't mean there aren't plenty of willing and able buyers. Appert said many buildings, including the Nic on Fifth and the Elan, are attracting multiple bidders who see the reset in prices as an opportunity to buy for upward of half of what it would cost to build those buildings today.

"They're trying to take advantage of the lack of core capital in the market," he said. "It's a very fluid market."

MSCI Real Estate, which tracks commercial prices, said apartment prices nationwide during April declined 12.1% from the previous year with prices steadily declining month-over-month.

CBRE's Ted Abramson, who was also part of the team that represented the seller of Nic on Fifth, said the building was about 93% occupied when it went to market. He said the Twin Cities remains an attractive place for investors because the rent-to-income ratio makes it one of the most affordable in the nation.

The apartment vacancy rate across the metro at the end of the second quarter was 4.1%, with rents that rose more than 4%, according to Marquette Advisors. In the southwest Minneapolis submarket, which includes Uptown, the vacancy rate was only slightly higher, with rents that remained stable compared with last year.