Outstate MN – Apartment Trends
In the past 12 to 18 months, I have appraised numerous outstate Minnesota apartments ranging in size from about 20 to 100 units. The geographic region has spanned the “banana belt” surrounding the Minneapolis/St. Paul metropolitan area. The primary cities forming the “banana belt” include Rochester, Mankato, St. Cloud and Duluth.
Some pretty consistent observations appear across most of these properties. Of course, not all properties are operated and managed the same – exceptions do exist. Most property owners have increased their rents annually (about $5 to $20 per month, per unit) and vacancy rates in most of the surveyed properties are less than 5.0%. Rental concessions are rare and this has led to some growth in net operating income. However, rising operating expenses in a large percentage of these properties partially mitigate the NOI growth.
Most property owners report general optimism for continued strength in the outstate apartment market, particularly with a stable tenant base. The rental market has been helped by manufacturing employers that appear healthy. Several markets, such as Mankato, have recently constructed new industrial buildings. The new construction is a result of expanding local businesses and a few new companies entering the market.
With continued low interest rates, capitalization rates in outstate Minnesota have seen some compression in the past 6 to 12 months. Property owners and brokers cite the continued low interest rate environment and favorable apartment market conditions have spurred the cap rate compression. In some instances, higher quality apartments in the larger communities (such as Mankato, St. Cloud, etc.) have dipped below 7.00%. Cap rates for average-to-good quality properties in smaller communities have ranged from about 7.00% to 8.00%. Properties with some level of deferred maintenance and/or older properties tend to sell at cap rates of 8.00% and above.
As we begin 2015, I wish everyone a Happy, Healthy and Prosperous New Year!
Thank you for taking the time to read this article. Mitchell Simonson, MAI is an expert commercial real estate appraiser and investor. If you have any valuation questions, please feel free to call at 612-618-3726 or email mitch@simonsonap.com.