In June 2016, Think Realty Magazine featured the Twin Cities, Minneapolis and St. Paul, Minnesota, in its “Regional Investor” feature. At that time, the regional housing market was benefitting from an overall improving economy, falling jobless rate, and rising equity. Low inventory in the “starter home” sector had begun to push sales prices upward, and the rental market was extremely strong, with less than two percent vacancy. The area was ripe with opportunity for real estate investors, although there were a few pitfalls associated with localized trends that sometimes placed cool and hot neighborhoods in close proximity to each other.
One year later, that gradual, localized warming trend has become a full-blown housing heat wave. The Twin Cities’ low unemployment rate has held steady, and the region was labeled one of a dozen “Hottest Job Markets for 2017 College Grads” by Team ZipRecruiter this past spring. With rents continuing to rise, home sales prices up 6.3 percent over April in May of this year, and first-time buyers fighting for a limited inventory of starter homes in the area, investors who were active in the market a year ago are likely feeling pretty good right about now.
Getting Creative with the Inventory Crunch
Of note, however, is an unusual inventory issue that an investor willing to work in creative financing might leverage: a number of homeowners who bought their first homes before the housing crash are still waiting to sell because they do not feel that they have enough equity to move. According to Minnesota’s StarTribune, even though there are far fewer homes with negative equity in the Twin Cities housing market today (fewer than one in 10, compared to two in every five in 2011), the number of properties in the area with “effective negative equity,” meaning that the homeowners will not be able to move up if they sell their existing home because they have a fairly low amount of positive equity or are just barely breaking even, is still higher than one in five.
Furthermore, most of those “effective negative equity” homes are starter homes. Since the owners of these properties are also watching the market heat up and realize that by simply waiting on demand their eventual sales price is likely to rise significantly, the starter home inventory in the area is very tight. Investors who have a good source of these first-tier homes or who can work with sellers who do not want to sell via conventional methods may access a valuable source of deals that is in high demand.
Check Up: What We Said in 2016
In the original article, we highlighted two specific zones in the metro area that were showing signs of promise: Minneapolis’ North Loop and Downtown East.
The North Loop was on its way to becoming “the epicenter of art and commerce” thanks to walkability, a thriving arts community, and mixed-use development that was likely to be highly attractive to Millennials. One year later, an interesting combination of Baby Boomers and Millennials have created what one local investment firm principal described as a “feeding frenzy” in the area. At the end of 2016 there were fewer than three weeks’ worth of housing supply in the area, and rental vacancies were “next to nothing,” she said.
Downtown East, which was set to benefit from a new $1.1-billion football stadium for the NFL’s Minnesota Vikings and commercial development associated with that stadium, experienced some development setbacks thanks to issues with a planned greenspace intended to supplement the stadium and other activities in the area. However, at present, the area is still growing and developing, with about $2 billion in public and private investment at the end of 2016. It also has a new name, East Town.
Has the Window Closed on Investing in the Twin Cities?
Although it probably would have been a little simpler to get involved in the Twin Cities market a year ago, real estate investors interested in getting involved in the area today are certainly not too late. The market is still highly localized, however, with some hot spots abutting areas where crime is a big deterrent for buyers even though prices are good. An investor willing to do their due diligence, however, and go the extra mile to find off-market deals will likely do well.
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