December 11, 2024

Accelerating Renter Demand Supporting Multifamily Absorption Totals in Minneapolis-St. Paul

Q3 2024

Multifamily property fundamentals in the Twin Cities were steady during the third quarter, as renter demand closely tracked supply growth. Year-to-date absorption levels have been elevated compared to totals recorded in 2022 and 2023. During the past 12 months, net absorption in the region has totaled approximately 11,750 units, up 33 percent from year-earlier levels. Heightened renter demand has helped to keep vacancy conditions steady, with the rate unchanged and somewhat lower than in early 2023. Steady vacancy conditions are supporting rent growth, although recent gains are more modest than the region’s long-term averages. Apartment rents were unchanged during the third quarter, and rents have advanced by 2.6 percent during the past year.

Multifamily properties in the Twin Cities continued to change hands in recent months, as sales activity has returned closer to historical norms after restricted activity in 2023. Cap rates have adjusted higher to this point in the year, ranging between 6.25 percent and 7 percent in most cases after being as low as the mid-4 percent range in 2022. The cities of Minneapolis and St. Paul have accounted for approximately 40 percent of the sales that have occurred to this point in 2024, tracking the region’s long-term trends. Outside of the core population centers, sales have also been recorded to the north and northwest in cities such as Brooklyn Center, Brooklyn Park, Fridley, and Maple Grove.

Looking ahead

Operational stability in the Minneapolis-St. Paul multifamily market should continue in the coming months and into 2025. The pace of new development has been on a gradual decline in the Twin Cities since peaking in 2021, and deliveries this year are expected to come in slightly lower than in 2023. The development pipeline has thinned to the point that completions of new projects are expected to decline over each of the next two years. Vacancy is forecast to close the year at around 5 percent, which will mark two full years of the rate remaining in the low-5 percent range. Stable vacancy conditions should promote further rent growth for the foreseeable future.

Multifamily properties in the Twin Cities are expected to continue to change hands at a pace that tracks the region’s historical levels. Total sales to this point in the year have already surpassed levels recorded in all of 2023, with annual sales velocity in line with levels recorded in the five years leading up to the light volumes posted last year. One reason activity has regained momentum is cap rates, which have pushed higher in 2024 and are forecast to remain near current ranges. To this point, nearly half of the sales have occurred in the major population centers of Minneapolis and Saint Paul, although it appears there could be an uptick in activity outside of the market’s two core cities.