Beyond the Short-Term Challenges: A Path Forward for Lease-Ups

Multifamily developers across the nation are facing short-term challenges in filling properties. Rental rates in some areas are lower than projected, which is impacting revenue and investor confidence. It is important to recognize that this headwind is a temporary issue, and the long-term landscape remains promising. In the content to follow we will be summarizing the current market conditions and their impact on lease-ups as well as providing a few key themes for investors to consider.

Market Overview

Roers Companies is developing market rate multifamily product heavily in Minneapolis, Minnesota; Austin and Dallas, Texas; and Salt Lake City, Utah. Despite today’s short-term slowdown, from a market rent perspective, each of these markets exhibited a consistent upward trend in asking rents from the year 2000 through the first quarter of 2024, without any instances of decline. Notably, a pronounced acceleration in rent increases emerged across all cities post-2010. Predictive models suggest this upward trajectory will persist, with no anticipated extended plateaus or reversals in the near future. While the general direction is shared among all markets, the rate of increase varies significantly. Cities like Dallas have experienced a steeper climb in rents compared to a more moderate pace observed in markets such as Minneapolis. These trends likely reflect the strength of the overall housing market and may be correlated with broader economic factors, such as inflation and heightened housing demand, which could be contributing to the sustained rent increases from a long-term perspective. 

In terms of rent growth, Salt Lake City has exhibited the most significant fluctuations in annual rent growth, contrasting sharply with the stability observed in the Minneapolis market. A common trend across all markets is a peak in rent growth around the early 2020s, potentially attributable to factors such as the economic recovery following the COVID-19 pandemic. Looking ahead, forecasts for the 2025-2029 period indicate a stabilization of rent growth across all markets, suggesting a potential market maturation and adjustment. This trend is particularly evident in markets like Austin, which experienced rapid growth, and are projected to converge towards average growth rates. Conversely, cities like Minneapolis — characterized by consistent growth patterns — are expected to maintain their sustained stability.

All cities analyzed have experienced growth in construction activity as a percentage of inventory. Notable periods of expansion occurred post-2009 and post-2020, likely influenced by increased housing demand and favorable economic conditions during recovery periods. Among the cities, Austin exhibits the most pronounced volatility in construction activity, with significant year-over-year fluctuations culminating in a peak of over 18% of units under construction in 2022. Salt Lake City also demonstrates considerable volatility in this metric. In contrast, Minneapolis stands out as the most stable market with more gradual increases in the percentage of inventory under construction. Austin and Dallas are characterized by particularly high levels of construction activity relative to inventory in the years leading up to 2024. Salt Lake City has also experienced a substantial uptick in construction activity post-2020.

In-Depth Analysis for Roers Cos.’ Top Markets:

Minneapolis 

With a substantial increase in unit inventory, the Twin Cities has witnessed unprecedented multifamily development in recent years, positioning the market for long-term growth. While a temporary oversupply has led to increased vacancy rates and moderated rent growth, this presents a unique opportunity for investors. The multifamily market in the Twin Cities had a remarkable year of development in 2023, setting a new record for the fourth consecutive time. This rapid expansion has created a diverse range of housing options to cater to a growing population. As the market absorbs this new supply and demand dynamics stabilize, rental rates are expected to rebound. Moreover, the Twin Cities’ strong economic fundamentals — coupled with its reputation as a desirable place to live — make it a resilient market. This resilience, combined with the current market conditions, presents an attractive investment climate for those seeking prolonged value appreciation and stable cash flow. 

Austin

Austin’s dynamic multifamily market is currently undergoing a period of rapid growth and adjustment. While a surge in new unit deliveries — a staggering total of 26,000 units delivered in the trailing 12 months, a historical high for the market — has temporarily elevated vacancy rates, this presents a unique opportunity for forward-thinking investors. The market’s robust fundamentals, driven by strong job growth and population influx, remain intact. The current oversupply phase is a cyclical market correction that will eventually create a favorable environment for rental rate growth. With construction starts decelerating, the market is poised to rebalance supply and demand in the near future. Moreover, Austin’s long-term prospects remain exceptionally strong. As the city continues to attract talent and businesses, the demand for quality rental housing will remain resilient. This combination of short-term challenges and long-term opportunities makes Austin an attractive market for investors seeking to capitalize on future appreciation and stable cash flow.

Dallas

The Dallas-Fort Worth metroplex continues to exhibit its dynamic nature with a surge in multifamily development. While a temporary oversupply has led to elevated vacancy rates — 10.5% versus the 10-year average of 7.9% — the market’s underlying fundamentals remain exceptionally strong. The region’s robust job market, coupled with consistent population growth and corporate relocations, underscores the sustained demand for rental housing. The current market conditions present a strategic opportunity for investors to acquire assets at potentially attractive valuations. As the market absorbs the excess supply and demand continues to strengthen, rental growth is expected to rebound. The metroplex’s position as a leading economic hub and its appeal to a young, growing population solidify its status as a prime market for multifamily investment. The robust job market and population growth in the region continue to drive the demand for rental housing, particularly among the 20- to 34-year-old demographic. The competitive single-family housing market and rising interest rates are also contributing to higher rates of renter retention.

Salt Lake City

The current market dynamics in Salt Lake City are heavily influenced by supply, even as demand shows signs of growth compared to the previous year. While vacancy rates have risen, this presents a strategic opportunity for investors with a long-term perspective. The city’s strong economic fundamentals, driven by job growth and population expansion, remain intact. The current oversupply phase is a cyclical market correction that will eventually create a favorable environment for rental rate growth. Notably, there are around 7,200 units under construction, particularly concentrated in Downtown Salt Lake City, making it one of the most rapidly developing submarkets in the nation. Despite this, annual rent growth is slowing down, currently standing at -1.0% compared to -0.9% last year. Local property managers are adapting to this landscape by offering more attractive renter concessions due to increased availability. Salt Lake City’s reputation as a desirable place to live, coupled with its proximity to outdoor recreation and a high quality of life, continues to attract residents and businesses. This underlying strength, combined with the current market conditions, presents an attractive investment climate for those seeking long-term value appreciation and stable cash flow.

Roers Cos. Internal Data

Despite current market challenges, last year Roers Cos. successfully stabilized our project in Blaine, Minnesota — Lexi — ahead of schedule, achieving over 50% pre-leasing. While our project in Oakdale, Minnesota — Espen Townhomes — had a slower start, adjustments in pricing and concessions have led us to a promising 42% occupancy at Espen Townhomes as of July 2024, surpassing the initial projections of 35%.

As a firm based in the Minneapolis market, Roers Cos. is dedicated to investing in resources that keep our team well-informed and ensure a deep understanding of the market is maintained. Moreover, as a rising force in the Austin market, we continue to expand our presence with a regional Austin office and more units set to launch in 2024 and 2025. Roers Cos. stands out as a vertically integrated company excelling in development, construction, leasing, property management, and asset management, setting us apart from those with a singular focus. This integration enables us to achieve significant cost savings and efficiencies that others cannot match. 

With a keen eye on local markets, strong industry connections, and a thorough evaluation process, Roers Cos. refines each opportunity offered to investors. Beyond cost savings, Roers Cos. kickstarts leasing ahead of the competition and secure more leases before the project’s completion. This proactive approach results in accelerated income timelines, with a higher percentage of units occupied upon project opening.

Observing the current market trends, Roers Cos. operates properties at a significantly lower cost of $200 to $500 per unit per year compared to competitors. Emphasizing Roers Cos.’ lease-up process, Roers Cos. strategically launches projects six to eight months ahead of receiving the certificate of occupancy. This approach enables us to open with an impressive 30% more units pre-leased than industry counterparts. With dedicated lease-up specialists assigned to each project, Roers Cos. maintains leasing momentum, foster relationships with future residents, and ensure a seamless transition for move-ins. 

Our in-house partnerships with developers, construction managers, marketers, and asset managers allow us to effectively manage budgets and capitalize on opportunities for rent increases. By closely monitoring project budgets and revenue quarterly, Roers Cos. proactively identifies and implements new revenue-generating opportunities. Managing properties with Roers Cos. employees provides us with complete operational transparency, enabling us to swiftly pivot and seize any emerging opportunities. Weekly monitoring of key performance indicators allows us to track performance and address any challenges promptly.

The current multifamily landscape is marked by both challenges and opportunities. While short-term headwinds such as oversupply and decelerating rent growth exist, the long-term fundamentals of our target markets remain strong. Roers Cos. is uniquely positioned to navigate these complexities through our deep market knowledge, operational expertise, and proven track record. Our vertically integrated platform allows us to optimize costs, accelerate lease-ups, and deliver exceptional returns for our investors. As the market evolves, we remain confident in our ability to identify and capitalize on emerging trends, ensuring continued success for our partners.

Current as 08/13/2024

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NO OFFER OF INVESTMENT, LEGAL OR TAX ADVICE. The material contained herein is general information for educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. Prior to making any investment you should consult with a licensed investment, financial advisor, legal and tax advisor.

Sources: CoStar, Jay Parsons, Newsweek, Star Tribune