At the national level, a high volume of new supply and persistently low apartment demand has put pressure on both average occupancy and average effective rent growth. A distinguishing factor between markets in an environment where apartment demand remains tepid generally across the board has been new supply.

Markets with high deliveries have seen a significant impact on market-level occupancy as a result, whereas markets without elevated deliveries relative to their longer-term averages have largely struggled through muted absorption performance but without the added weight on occupancies from deliveries. One market that stood out in the 2023 data through July was Minneapolis – St. Paul.

As always, numbers will refer to conventional properties of at least fifty units.

New Supply and Net Absorption

Around 4,200 new units delivered through July was a bit higher than the average derived from the same portion of the previous five years but also represented a decline in deliveries relative to both 2021 and 2022. All but three of the fourteen ALN submarkets in the region have seen the introduction of at least one new property so far this year. Leading the way with nearly 1,000 new units was the Rosedale submarket. After that, the Central Minneapolis and the Eagan – Apple Valley areas have added around 800 and 700 units, respectively.

Net absorption of approximately 4,900 units across the market through July fell short of the total from the same period in both 2021 and 2022 but was higher than in any year in the 2018 through 2020 period. While the absorption total was not eye-popping, where Minneapolis – St. Paul has stood out this year is in size-adjusted net absorption compared to other markets. This refers to net absorbed units as a percentage of market stock. The area ranked nineteenth in the country through July but was the first-ranked market among those with at least 1,000 conventional properties.

Demand has been relatively robust at the top of the market. For both the Class A and Class B subsets, net absorption in the range established over the last couple of years and better than in the couple of years preceding the COVID period. The struggle has been in the workforce housing segments. Class C properties have managed to add only about 250 net leased units in the first seven months of the year, and Class D properties have suffered a net loss of around 500 net leased units.

Market-level average occupancy increased by fifty basis points since the start of the year and closed July at just under 92%.

Average Effective Rent and Lease Concessions

The average effective rent for new leases rose by just less than 3% in the period to finish July at about $1,480 per month. Of recent years, only the 2020 total was lower than this year’s, but this year’s appreciation has slightly outpaced the national average.

Interestingly, Class C average effective rent growth for new residents was essentially on par with that in the top two price tiers. This aggressiveness on the part of operators may partially explain the struggles on the net absorption front within the Class C group.

Considerable differences were present at the submarket level. The outlier on the top end was the Mankato – Outlying SW Counties submarket where a very high average occupancy to begin the year was paired with a new property being delivered and the result was an almost 9% average effective rent gain for new leases. Other strong performers includes the Rosedale and St. Cloud – Outlying NW Counties regions which both added almost 5% to their average effective rent. On the other end of the scale, A decline of approximately 1% made the Central Minneapolis submarket the only one to see a decline in the average effective rent.

Lease concession availability declined from the start of the year, but this was more a reflection of seasonal trends than robust demand since the summer period tends to be the time of year when concession availability is lower. When compared to July in recent years, this year’s 16% of properties offering a discount for new leases was the highest of the last five years.

Lease concessions continue to play an especially prominent role in two areas of the market specifically. Unsurprisingly, these two areas have the lowest average occupancies of all submarkets. In the Central Minneapolis submarket, 45% of conventional properties were offering a discount for new residents at the end of July. For the Downtown Minneapolis – Midway area, lease concession availability stood at 35% of properties offering.

Takeaways

Multifamily performance in the Minneapolis – St. Paul market has been solid so far this year within the context of the broader multifamily environment. Without the same level of pressure from the new construction pipeline as in many markets around the country, the area has managed to stave off an average occupancy decline. Average effective rent growth for new leases has also outpaced the national average. Demand, while not at the dazzling level of 2021, has been healthy. This has not just been the case in terms of total net absorbed units but was also reflected in the size-adjusted absorption metric.

Some soft spots were present in the data as well. In particular, in the workforce housing segments and with some variance at the submarket level. The workforce housing subsets have seen average occupancy declines this year in the face of demand troubles. At the submarket level, four areas finished July with average occupancy below 90%. One was Rosedale, and this was attributable more to new supply. The other three were Central Minneapolis, Downtown Minneapolis – Midway, and Central St. Paul.  Each of those submarkets entered the year with average occupancy below 90% and are unlikely to regain that threshold in 2023.

With some of those caveats aside, the Minneapolis – St. Paul market finds itself fairly well-positioned as the second half of the year continues to unwind. 2023 may not finish as a top-performing year for the area, but the market should compare favorably to national performance.

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