In 2016, the Twin Cities multifamily investment landscape has witnessed a significant shift from core/core+ to value-add in terms of transaction activity and investor interest. While 2015 included a number of notable new build and pre-sale transactions to institutional and private equity investors, 2016 would be best characterized as a flock to value-add deals.
While construction activity remains strong, the appetite for pre sale and recently stabilized product has waned to some extent. This is also seen in the more limited capital pipeline to fund new development, as projects are more heavily scrutinized and investors have become very selective about size, submarket and delivery timeline.
That said, interest in large value-add deals has soared. Cap rates have compressed noticeably on these deals as investors chase the limited pipeline of available properties. Unlike other national secondary markets, the Twin Cities continues to show a relatively restricted listing environment, which accounts for some of the cap rate compression. The more significant piece appears to be the widespread success investors have seen through implementing value-add programs on older product. Whether the budget calls for a limited in-unit and common area refresh or a heavy construction plan to renovate the entire property, buyers are able to push rents to match the required ROI for the capital outlay.