If local apartment developers have a current theme song, it would have to be “Welcome to the Boomtown.” In burgeoning areas like the North Loop in Minneapolis, home to Target Field and walking distance from the downtown core, residents are flocking to new buildings outfitted with pools, dog walks, rooftop gardens, bocce courts, and other fancy perks.

Construction cranes can be seen just about everywhere, with 3,100 new apartments slated to open this year alone, according to Brent Wittenberg, vice president with real estate consultancy Marquette Advisors. That’s more than any single year since Marquette began tracking the market in 1996. Most are considered luxury; another 5,200 units are to be completed next year, not counting student housing.

The 30 market-rate apartment projects underway in the Twin Cities are bringing in an estimated $1 billion to the local construction industry, while feeding an apparently insatiable appetite for high-end living that requires no property ownership, and shows no signs of letting up. Minneapolis continues to rank among the strongest apartment markets in the country. Yet some market observers are beginning to watch the cranes with concern. Real estate has always been a cyclical business prone to periods of boom, tapering development, bust, and stabilization. And there are already signs that not every planned apartment project will be built after all.

The billion-dollar question of the moment: If residential real estate development is the ultimate business roller coaster ride, full of exhilarating climbs and stomach-churning drops—how long until the screaming starts?

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There’s no clear answer, in large part because every developer is wired to believe that he is savvier than his competitors and he alone has the best site for a new project. If the market starts to struggle, he thinks his competitors may stumble, but that his project will be fine. And his confidence is bolstered by apartment market evangelists (many with a vested interest in prolonging the boom times) who continue to beat the drum for market growth, pointing to low rental vacancy rates, solid job growth, lender confidence, and brisk leasing at new buildings as signs that the market remains hungry for more new apartments.

At the same time, some observers look at the large volume of pending new, pricey units and say there’s simply not a bottomless supply of people who can afford to pay steep rental rates in new buildings. Real estate veterans recall that when the condo market crashed, work ground to a halt, investors and developers lost money, and some sites landed back in the hands of lenders.

“If you look over time, you see cycles in real estate,” says Toby Madden, regional economist for the Federal Reserve Bank of Minneapolis. Few new projects were built during the recent economic downturn and “rents started increasing, so that gave the signal to the marketplace to build more,” he says. “The big question right now is . . . will they overshoot on the supply side? Some people say ‘No, [because] we didn’t build for so long.’ A lot of people say we’re smarter than we were in the past.”

Luxury apartment bonanza

Downtown Minneapolis is ground zero for the apartment-building boom, with the most projects in the pipeline, and the majority of those apartments priced at the upper end of the market. Call them “luxury,” “upscale,” “high-end,” or just expensive.

Most rent for $2 a square foot, which translates to $24,000 per year—for 1,000 square feet. For example, the just-opened 222 Hennepin project in downtown Minneapolis, a 286-unit project that includes a Whole Foods grocery store, is drawing rents of $2.20 per square foot.

Such luxury prices make the overall downtown Minneapolis apartment market the most expensive in the metro area, with an average monthly rent rate of $1,340, at the end of June, according to Marquette Advisors. That’s 37 percent higher than the metrowide average of $979.

And demand continues to grow: The latest statistics from Marquette show that the pace of rentals is outpacing the completion of new apartments, which is keeping vacancy tight. The firm reported absorption of 2,142 apartment units during the first six months of the year, compared with 1,142 new units opening during the period.

But downtown Minneapolis also is where less positive omens are beginning to appear.

Chip Johnson, founder and president of Atlanta-based Turnstone Group, LLC, had a plan for a new apartment project on a surface parking lot at the corner of First Avenue North and Eighth Street, a half-block off Hennepin Avenue in downtown Minneapolis. His real estate investment firm, once based in Minneapolis, where it maintains an office, previously developed apartment projects including the Murals at LynLake in south Minneapolis, which was completed in 2008.

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Johnson ultimately scrapped plans for the downtown project in late 2012. On paper, he says, the Twin Cities apartment market looks like it’s in great shape. But Johnson says the sheer volume of other competing projects, along with rising construction costs, was a cause for concern.

“What gave me pause is that we’re all in the same price point. To build new ,you have to be in that upper price point, because of the construction costs,” Johnson says. “Fundamentals still look strong, but there’s a lot of units coming online. When everybody’s looking at [the same thing] . . . you have to be a little careful.”

Instead, Turnstone struck a deal to sell its site to Golden Valley–based Mortenson Development, which has proposed a 210-room Hampton Inn on the site.

Proposed Projects in Downtown Minneapolis 4Marq, a 262-unit tower by Mortenson Development

Project at 301 Washington Ave. S., 320 units proposed by Alatus, LLC

Mixed-used plan in downtown east, 300+ residential units proposed by Ryan Companies

The Turnstone project is not the only place in downtown Minneapolis where an apartment plan has been shelved. Todd Phillips of Minneapolis-based TruCore Realty was pursuing a plan to convert the Plymouth Building, a vintage office building on Sixth Street east of Hennepin, into approximately 250 apartments. Industry sources now say that another group is looking to convert it into a hotel. (Phillips could not be reached for comment.) Wittenberg says Marquette Advisors is not counting the project on its list of proposed apartment projects.

And there’s one more twist: As the housing market begins to stabilize, a few developers see an opening for condos again.

Veteran developer Jim Stanton of Coon Rapids–based Shamrock Development is building Stonebridge Lofts, a brand-new 164-unit condo building in downtown Minneapolis near the Guthrie Theater. At press time, he said he had 89 presales and seven reservations; the building is set to open in spring 2014.

Did Stanton ever consider apartments at his site?

“Not too seriously,” he says. ““My read is, [with] the apartments, we might be approaching a bubble. We have an awful lot of them coming on in a short period of time,” Stanton says of the current rental market. “I decided to go where the competition ain’t.”

The Penfield

Originally proposed as a condo tower, the project now calls for 254 apartments and a Lunds grocery store in downtown St. Paul. The first residents can move into the Penfield in late November. The city of St. Paul is the developer. Originally proposed as a condo tower, the project now calls for 254 apartments and a Lunds grocery store in downtown St. Paul. The first residents can move into the Penfield in late November. The city of St. Paul is the developer.

Follow the money—and jobs

The current apartment boom is being driven by a variety of factors, including the recent shakiness in the single-family home market, which has been plagued by foreclosures, depressed prices, and tight credit. In response, many flocked to renting.

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Another driver is a single four-letter word: jobs. Through the end of July, the Twin Cities had added 64,400 jobs in the previous 12 months. Statistics from the state’s Department of Employment and Economic Development show that through the end of the first quarter, the city of Minneapolis added 8,041 jobs in the previous 12 months.

Downtown Minneapolis was home to 36,500 residents as of February, according to the Minneapolis Downtown Council. The Council’s Downtown 2025 Plan calls for expanding the downtown population to 70,000 people and adding 15,000 housing units. Fortune 500 companies based downtown include Target, U.S Bancorp, Ameriprise Financial, and Xcel Energy.

In markets across the United States, says Jay Denton, vice president of research for Dallas-based Axiometrics, Inc., an apartment market research firm, investors have been drawn to downtown, rather than suburban, projects. Denton says investors think downtown apartments represent good long-range investments, bolstered by the trend of renters looking for convenient, emerging neighborhoods close to both work and entertainment options. “Really it’s about exclusivity of the neighborhood,” Denton says. “It has to do with where they feel values are going to hold up over time.”

“The institutional money has wanted to be [in the] urban core,” says Denton. “If the urban core does start to dry up, we could see a slowdown in multifamily construction in 2015.”

Job growth and apartment development are inextricably linked. Nationally, Washington, D.C., is being watched closely as a market at risk for a glut of new apartments. Denton thinks it is not creating enough new jobs to support the volume of apartments in the pipeline.

“[Developers and investors] look at Washington, D.C., and they get scared,” he says; worry about rising vacancies, lower investment returns, and a slowdown in future development. “It’s the one market where oversupply is really feared.”

In contrast, Denton sees the Twin Cities as a healthy apartment market, bolstered by solid job growth. But D.C. might have some parallels for the market here; the looming glut happened in part through a bullish rush to build new projects there, as the city fared better than most during the downturn.

“All of the sorts of institutional money looked to that market as a great long-term hold,” Denton says. “It’s one of the first markets around the country where we’re seeing the number of [apartment construction] starts starting to fall off.”

The Nic on Fifth

The luxury apartment tower is being built in the heart of downtown Minneapolis.



One Southdale Place

The Edina project will add rentals near the Southdale Center shopping mall.



Mill & Main

Standing across the river from downtown Minneaoplis, the first phase opened in June. Photo by Brandon Stengel/ Farmfiel Studios



16 Twenty

Amid the apartment boom, some developers are reviving condo plans, including this boutique project in the Uptown area of Minneapolis.



Dock Street Flats

The 185-unit project in the North Loop area of Minneapolis opens in December.



222 Hennepin

Residents began moving into the downtown Minneapolis project, which includes a Whole Foods grocery store, in August. The North Loop site was previously home to a vacant car dealership. The project includes numerous amenities, including gathering spaces and a rooftop deck with a pool. The luxury apartment tower is being built in the heart of downtown Minneapolis.The Edina project will add rentals near the Southdale Center shopping mall.Standing across the river from downtown Minneaoplis, the first phase opened in June. Photo by Brandon Stengel/ Farmfiel StudiosAmid the apartment boom, some developers are reviving condo plans, including this boutique project in the Uptown area of Minneapolis.The 185-unit project in the North Loop area of Minneapolis opens in December.Residents began moving into the downtown Minneapolis project, which includes a Whole Foods grocery store, in August. The North Loop site was previously home to a vacant car dealership. The project includes numerous amenities, including gathering spaces and a rooftop deck with a pool.

Wariness descends

So far, the Twin Cities market isn’t slowing down, since the pace of rentals exceeds the volume of units completed. National surveys show the Twin Cities with one of the lowest vacancy rates in the country. New York–based commercial real estate research firm Reis, Inc., reports an apartment vacancy rate of 2.1 percent at the end of June, compared with 4.3 percent rate nationally.

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Locally, Marquette Advisors reports that apartment vacancy rates actually dropped to 2.3 percent in the second quarter, a notable decline from 2.8 percent in the first quarter of the year. A vacancy rate of 5 percent is considered equilibrium between tenants and landlords, making 2.3 percent a strong landlord’s market.

“We don’t foresee that we’re overbuilt,” Marquette’s Wittenberg observes.

But looking ahead, he forecasts that downtown Minneapolis apartment vacancy will climb from its current rate of 3 percent to somewhere in the range of 8 to 10 percent in 2014 and 2015 as units come on-line.

Marquette forecasts the downtown Minneapolis market will stabilize in late 2016. “There will be a temporary adjustment,” Wittenberg says. “We’re still talking about reasonable [vacancy] absorption schedules.”

Calibrating supply

If real estate remains an eternally cyclical industry, the question remains: When will the ground shift for apartment developers?

Jobs are a significant driver for new apartment rentals. But looking ahead, the pace of job creation is expected to cool off.

Madden says the Federal Reserve is forecasting a 1.4 percent gain in non-farm employment across Minnesota in 2013, but is only projecting 0.6 percent for 2014.

“That’s a big a question: Where are we in the cycle?” Madden says. “Are we still in the phase when we need more units to be built?”

Apartment sales broker Abe Appert, senior vice president at the local office of CBRE Group, Inc., says that between 1986 and 1991, developers built far more apartments than we’re seeing today.

“We’re building a third of what we did in that same timeframe,” says Appert. “We’re nowhere near any sort of bubble or major, major vacancy concession market.”

There are profound differences in the two apartment boom periods. Tom Melchior, director of market research for Minneapolis-based CliftonLarsonAllen, recalls a major rental building boom during the mid-1980s, but “the focus back then was really on suburban markets, and now it’s shifted [downtown],” Melchior says. “There was a brief oversupply and it took a little while for the market to absorb it. Everything will be fine. It’s just that people aren’t going to open and be full in six months.”

Which means it may not be a lessor’s market for much longer. Doug Wageman, a principal with Minneapolis-based Nicollet Partners, a real estate appraisal, brokerage, and consulting firm, expects owners will start offering concessions—specials or discounts—to draw tenants in 2014.

“Vacancies are going to creep up; they have to, in my opinion,” Wageman says. “That’s going to push the net rents down.”

When the breakneck pace of apartment development starts to taper, says Marquette Advisors’ Wittenberg, then “location matters more than ever.”

Pricey unveilings, bullish plans

For the moment, developers and owners opening new buildings are feeling upbeat.

The project budget for 222 Hennepin tops $70 million. The apartment building at the corner of Washington and Hennepin avenues opened in August; a new Whole Foods grocery there was set to open in late September. The fourth-floor rooftop deck includes striking views of downtown Minneapolis, a pool, outdoor grills, a fire pit, and a landscaped courtyard.

During the condo boom of the early/mid-2000s, an out-of-town developer proposed a condo tower on the site. The project was never built and the land went back to the lender. The property, a former car dealership, sat vacant during the downturn.

The project was developed through a joint venture of Minneapolis-based Ryan Companies, Eden Prairie–based Excelsior Group, and an institutional client of Dallas-based Invesco Real Estate, which manages nearly $50 billion in global real estate investments.

Rents start at $1,100 per month for a studio, $1,275 for a one-room apartment, and $1,825 for two-bedroom units. Penthouse units (two bedrooms and den, 1,560 square feet) start at $2,800 per month. Residents pay additional fees for parking spaces, pet access, and utilities.

Sixty-one percent of the units were already rented a few weeks after it opened. Just a few blocks to the west, Dock Street Flats is set to open in December.

“We’re expecting rents above $2.15 a square foot,” says Steve Luthman, managing director for Houston-based developer Hines. “The job creation engine in the Twin Cities is very strong. . . . It’s still an incredibly tight market. The firm views Minneapolis as one of our top markets.”

Luthman says Hines is in the early stages of evaluating a site it owns adjacent to Dock Street for a rental tower. “We’re bullish on it. [But] we’re in the early stages of our evaluation.”

Luthman isn’t concerned about the number of units in the development pipeline: “You’ve got to look at the jobs that are being created in the Twin Cities.” But, he adds, “I wonder when people are going to start buying homes again? That, to me, would be a headwind to the apartment sector.”

Minnetonka-based Opus Development Company is in construction on the Nic on Fifth, a luxury 26-story tower with 253 apartments. The project, slated to open in July, is adjacent to the Nicollet Mall LRT station and will be skyway-connected to the core of downtown.

The site was once home to the Powers department store, which closed in the 1980s. Dave Menke, executive vice president at Opus, says the developer once considered condos for the site, but never advanced a formal plan. For years, the land had been dominated by surface parking until the apartment boom drove redevelopment.

“It’s still a very strong market—downtown, that is,” Menke says. “It still continues to show great depth and strength. I don’t see it softening anytime soon.”

Menke says Opus is scouting sites for additional apartment projects. “We’re still very much fans of the sector,” Menke says. “We believe for the right kind of product at the right location, one can be successful.”

Do rentals have staying power?

The rental boom has been helped in recent years by the bumpy state of the housing market. Many people lost homes to foreclosure. Others couldn’t buy due to tightened credit during the recession. Many became renters, while others who were already renting never ventured into ownership.

Today, local residential sale prices are at the highest level in more than five years, according to statistics from the Minneapolis Area Association of Realtors. Median home sale prices peaked at $238,000 in June 2006 and fell as low as $138,500 in February 2012. By July of this year, the median sale price stood at $208,000.

“The Great Recession has left lasting scars on the economy,” says Aaron Smith, senior economist with New York–based Moody’s Analytics. “As foreclosures revert to normal,” he says, “there won’t be as much demand flowing into the rental market.”

Even the left-for-dead condo market is showing signs of life. After years of no development, new for-sale projects are taking root. Stonebridge Lofts in downtown Minneapolis is the largest condo project in the market, but others are in planning stages, including the 16-unit Linden Crossing in the Linden Hills neighborhood of south Minneapolis.

Minneapolis-based CPM Development is pitching 16 Twenty for the Uptown area. It’s a boutique condo project with only four residential units and about 10,000 square feet of office space. Units range from $1 million to $1.4 million.

“We’re getting real good interest,” says Nick Walton, a CPM partner. “These are more like four custom homes.”

But Dave Menke says Opus is sticking with apartments. “We have not turned our focus towards condos,” he says. “There will be, we believe, some opportunities in that sector, but at the moment our focus is on rental.”

In other words, he thinks, apartments have yet to crest that last hill in the roller coaster ride that is real estate development.

Burl Gilyard is TCB’s senior staff writer.

This article is reprinted in partnership with Twin Cities Business.