Housing boom isn’t slowing down

It’s difficult to predict when the student housing market will bust.

A view of the Marshall and the Venue at the Dinkytown construction sites, two new housing locations on SE 5th Street and 14th Avenue SE.

Lisa Persson

A view of the Marshall and the Venue at the Dinkytown construction sites, two new housing locations on SE 5th Street and 14th Avenue SE.

Nicolas Hallett

The student housing market near the University of Minnesota remains stable with historically low vacancy rates, but developers and real estate experts agree its future is a mystery.

Nationwide, the housing market is recovering from the Great Recession, but some markets are rebounding faster than others. The Twin Cities metro area boasts the fifth-lowest vacancy rate in the U.S.

Developers are taking advantage of this by building more and more. The University gained nearly 500 apartment units in 2013, and more than 1,500 are expected in the next three years, according to May data from real estate consulting firm Marquette Advisors.

Minneapolis City Assessor Patrick Todd said this raises the question: When does the market hit saturation?

Area developers said they’re watching closely, hesitant to propose any future projects for now. But it may be hard to stop when many say they’re experiencing record leasing numbers.

“We’ve never been this leased this soon,” said Tim Harmsen, owner of Dinkytown Rentals and landlord of roughly 700 bedrooms near campus.

Doran Companies CEO Kelly Doran said his five open properties near the University are completely full this year.

“I think the market is in danger of being over-built,” he said, “but we’ll just have to see what happens.”

Because of this demand, renters have increased what were already considered “luxury” rent rates. The average rent across the Twin Cities increased to $984 this year, up 3.5 percent from 2012, and it’s projected to rise even more, according to Marquette Advisors’ most recent quarterly report.

“When you have low vacancy for an extensive number of quarters … that increases the opportunity to raise rents,” Marquette Vice President Brent Wittenberg said, adding that the demand is still exceeding the supply.

The Twin Cities metro area average vacancy rate has remained below 3 percent for more than two years, according to the November report, and the gold rush for developers shows little signs of stopping.

“When you talk to realtors, they’re saying we’re seeing one of the best markets we’ve seen in years,” Todd said. “There’s nothing for me to say, ‘Boy, the market has peaked.’”

But Todd says this was the case right before the housing bubble popped in 2005.

“Everybody knew the market was just on fire,” he said. “But, no one knew: When will we hit that point where one more building is just too many more buildings?”

The future of development

The Twin Cities vacancy rate increased slightly to 2.5 percent in the last three months, according to the Marquette report — but it’s not as high as experts forecasted.

In May, Wittenberg predicted the vacancy rate would reach 6 percent by 2014 and possibly scrape 7 percent sometime during 2015-16, based on the number of units set to open.

There’s a 50-50 chance the University area could reach these levels, Maxfield Research Inc. President Mary Bujold said. Maxfield Research specializes in development feasibility studies.

Bujold said she wouldn’t advise a client to open a large-scale student project in 2016 or beyond.

Doran said he’s concerned about market saturation, but that didn’t factor into his decision to change plans for an apartment complex in the heart of Dinkytown to a 125-room hotel.

It could be Doran’s last campus development for some time. Because of all the development around the University, Doran said he’s not looking at other student development opportunities right now.

When his newest apartment complex, the Bridges, opens this fall, Doran said he’ll own 1,200 bedrooms near campus.

“If some unbelievable property came down the road at us, would I look at it? Sure,” he said. “But I would have real reservations about building something.”

CPM Companies owner Daniel Oberpriller owns 2,400 beds and has been leasing since 2005. He said vacancies are very rare.

Oberpriller hopes to open his latest luxury housing project, WaHu, in 2015. With 333 units and 27,000 square feet of retail space, it’s the largest proposed development in the University area. Oberpriller is also building a smaller project, 700 Washington, in Stadium Village.

After WaHu is finished, Oberpriller said he’ll have to step back and re-evaluate the market, but he said he isn’t worried about the University area’s vacancy rising.

“I just flat out don’t see that happening,” he said.

The University houses a low percentage of its students on campus compared to other Big Ten schools, which Harmsen said is the reason he’s rented his properties for next fall at a record pace.

If the market busts, Harmsen said the properties closest to campus will survive. Customers should be rooting for this, Harmsen said, because only the landlords will suffer.

“Competition helps everybody,” he said. “If you explode a market, then the prices will go down.”

A different market

Food systems sophomore Courtney Pietras said she’ll need to move out of her apartment in Sydney Hall next year because it’s too expensive.

The average student rent for a two-bedroom apartment near campus is $700 to $1,050 per bed, according to May data from Marquette Advisors.

Marquette’s Wittenberg said student housing doesn’t follow apartment industry standards, because it’s often furnished, it’s leased by the individual bedroom and it combines utilities into the rent structure.

Because it’s such a different animal, experts are tracking student housing on its own.

University enrollment numbers and the dying trend of student commuters also affect student housing unlike any other submarket, Bujold said.

But she said the most important factor driving the student housing boom is the willingness of parents to subsidize living costs.

“Students aren’t affording it; parents are paying for it,” she said. “I think the mindset has changed how parents interact with their children.”

Pietras said her parents currently pay more than $850 per month for her apartment.

Even if the market busts, Bujold said the last thing landlords will do is reduce rent. Instead, she said they’ll offer incentives like a free month of rent or complimentary televisions. These incentives are tax-deductible because they’re considered marketing expenses, Bujold said, so they’re better for developers’ bottom line.

“If everything comes online, there will be some rent discounts, eventually,” she said. “It depends on how bad the market gets. If the market gets really bad, yes, they will permanently reduce rents.”

Wittenberg said even if vacancy rates rise dramatically, they should bounce back.

“That’s not a disaster. That’s still not a red flag situation,” he said. “And I don’t know how to define one [for this market] necessarily.”