Pandemic, upended economy have yet to slow Twin Cities apartment projects

A Chicago developer paid more than $21 million this week for a pair of warehouses that will become part of a historic rehab project that aims to bring more than 500 rentals and a rooftop ice rink to the North Loop neighborhood in Minneapolis.

The conversion of the former Duffey Paper buildings into apartments is among several large rental projects that are poised to break ground in the Twin Cities this year, despite a statewide stay-at-home order that has unemployment claims soaring and property owners fretting about how many leases will get signed next month.

Will Murphy, CEO of CEDARst Cos., which plans to break ground this month on the first phase of the project, said developers remain bullish about the long-term prospects for rentals in the best locations in the Twin Cities.

"Over the life of a 10-year investment, COVID is of little consequence to us," he said. "There will be other macro events that we deal with, but COVID will be a distant memory."

Developers are planning to break ground on thousands of apartments in the Twin Cities, including a 23-story tower near the Mississippi River, which drew the go-ahead from the Minneapolis Planning Commission this month; a 16-story tower in the Elliot Park neighborhood and a 36-story mixed-use development near Target Field.

These projects have been in the works for years, and developers say with approvals in hand, financing in place and contractors ready to work, it's too late to turn back.

"We're still two years away from coming online," said Matt Alexander, senior vice president of Kraus-Anderson Development, which just started construction on the Larking, the 16-story tower in Elliot Park. "How will conditions in the market be at that time? I don't have my crystal ball handy."

Alexander said housing is a necessity and demand will continue, but not at the same pace as in recent years.

"There is still room for growth in the right locations," he said. "Our pipeline is still strong."

Brent Wittenberg, vice president at Marquette Advisors, said that while there are obvious concerns about the health of the market given the many economic uncertainties and a development pipeline that's flush with new units, most developers remain optimistic, especially about the projects that won't be delivered for a couple of years.

"And I think rightfully so, given the strength of our economy and how our market has rebounded from prior recessions," he said.

Certain submarkets are more vulnerable than others, said Wittenberg, including downtown Minneapolis, where development has been most intense and vacancy rates are already higher than average.

Wittenberg is sticking with his pre-pandemic prediction that about 8,600 new units would hit the market this year, but he's less certain about the 23,000-plus units that are under construction or proposed and expected to be completed in 2021 and 2022.

"We expect that some of those projects will in fact be postponed or canceled," he said. "We won't understand the full impact of COVID-19 on the apartment market for some time."

Some property managers are already offering rent discounts and other enticements to help attract and retain tenants, creating an economic vacancy rate (units where the full rent isn't being paid) that will exceed the physical vacancy rate (units that are unoccupied) in the Twin Cities, which is among the lowest in the nation.

Wittenberg said he's encouraged by the April rent-collection rate, which now stands at 93%, according to his recent survey. That's much stronger than in many U.S. markets, he said, though he expects the situation to get somewhat worse on May 1.

Since March 16, more than 542,800 Minnesotans have filed for unemployment. During the 2008 recession, apartment owners lost about one renter for every 27 lost jobs, Wittenberg said. Evictions are on hold under executive order by Gov. Tim Walz.

Warren Hanson, president and CEO of Greater Minnesota Housing Fund, said Wednesday that a survey by the Greater Minnesota Housing Fund (GMHF) of 31,500 rental units across the state, mostly in income-restricted buildings, shows that rental income declined by 16% from March to April, bolstering the need for more assistance for renters and landlords. The Legislature is debating a measure that would provide up to $100 million above and beyond federal assistance for rental owners and tenants.

Warren said rental owners are incurring additional operational costs including cleaning services, sanitation and staffing at a time when rental income is declining. He expects the situation to get worse this summer as temporary income support measures expire.

"Owners of affordable housing cannot maintain safe properties without adequate rental income," he said."

At the end of 2019 the average monthly rent in market-rate buildings in the Twin Cities was $1,290, nearly 6% higher than the year before and the biggest annual increase in at least a decade, according to Marquette Advisors. The average physical vacancy rate across the metro was 3.1%, but more than twice as high in downtown Minneapolis, where the largest projects are planned.

Lamar Newburn, vice president at Lee & Associates, the broker that facilitated the sale of CEDARst's purchase of the former Duffey Paper buildings, said there is still plenty of demand for developable sites, though properties coming to market now might not be able to fetch the same price they would have a few months ago.

"It's so fluid and things are changing so quickly," he said. "A day in this market feels like two weeks in the prior market."

CEDARst's Murphy said the key to surviving in what has become an increasingly competitive — and uncertain — market is creating a distinctive project. Plans for the latest acquisition include conversion of the two warehouse buildings into rentals, but also 34 new units that will be built on a parking lot. Renters in those buildings will share a 20,000 square-foot amenity space, including a bowling alley, paddle courts and the region's first full-size, rooftop ice rink that can be used for soccer and other outdoor activities during the summer, with renters in another Duffey building a block away along Washington Avenue that was acquired by the company last year.

"This project has something for everybody," said Murphy.

To help satisfy the growing need for more affordable rentals, the mixed-use Sherman Associates project at the corner of Washington and Portland avenues will include 90 income-restricted units in a seven-story mid-rise building next to the 23-story tower. The project will include retail and a fire station will replace the one that's already on the site.

Robert Pfefferle, director of development for Houston-based Hines' Minneapolis office, said Wednesday the North Loop Green project is scheduled to go ahead as planned with groundbreaking in August.

The 36-story apartment tower will have 450 rental apartments and a 14-story, 339,000-square-foot office tower situated among new plazas and walkways that will connect the Central Business District to the North Loop.

Mary Bujold, president of Maxfield Research, said she's not aware of any projects that have been scuttled.

"If we do not get back to some sense of normalcy among most of our economy by midsummer, then I think we'll see some higher vacancy rates," she said. "But I don't know that it'll be significant enough to say that development has to shut off."