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LOC C0rw15ULTIN Rental Market Trends Market Analysis for Downtown Redevelopment City of Centerville Economic Development Authority April 3, 2023 The apartment market in the Minneapolis -St. Paul Metro Area has been very strong over the last several years. Driven by a tight labor market, strong wage growth, and lack of affordable for -sale housing, demand for rental has driven absorption across the market. At the same time, apartment developers continue to deliver new units to the market. According to Costar, a national real estate data provider,11,000 new rental units came online in 2022 in the Minneapolis -St. Paul market, nearly 2.5 times the average number delivered in the three years prior to the beginning of the pandemic (2017-2019). On average across the metropolitan area, supply of new units has outpaced demand, increasing the vacancy rate to 7.0% in the fourth quarter of 2022. In general, the market is considered to be at "equilibrium" when the vacancy rate is at 5%. At that point there are enough renters for property owners to be profitable and to be in a position to reinvest in their properties in order for them to remain marketable. Vacancies below 5% indicate a tight rental market, in which rents are likely to increase at rates well above other household costs. Typically, such low vacancies signal to real estate developers that enough excess demand exists in the market to support new construction, provided prevailing target market households can afford rents needed to cover the cost of new construction. It is likely that the currentvacancy rate will result in slower apartment development in the near future. Higher interest rates, higher construction costs, and supply chain disruptions are also putting headwinds on new development across the market. Figure 3.6 shows vacancy rate for the PMA and for the Twin Cities market as a whole. Figure 3.7 shows the average asking rent in the PMA and the Twin Cities Market as a whole. (Both figures are on the previous page.) Data for both tables is from Costar. ■ Mentioned previously, the vacancy rate in the Minneapolis -St. Paul Metro was 7.0% in the fourth quarter of 2022. ■ The vacancy rate for the Metro Area was below 5.0% from 2013 until the end of 2019. The rate 3.7 Vacancy Rates for Multifamily in the PMA and the Metro Area 8% 7%u 7.0% 6% 10 5%0 5.1 % id �.'A > 4% U C 3% 5 2% 1% 0% N CO " N CO "t N M "t N M N cl1 "t r� ci cr a a a 0 cr 0 a a cr cY a a a a a o �10 a0 a0 00 !�2 Ch CR 6] 0 O C7 O N N " N N CV N N N N N N N N N CV a a C7 C7 O CC7 O C7 O C7 CN C7 C7 O C3 C? O C7 C7 CIA N N N N N N N N N N N N N N N N N N N —PMA—Minneapolis Market Data is Q1 2017 to Q4 2022 Source: Costar; LOCI Consulting LLC Page 45