For a number of quarters in Twin Cities Rental Revue we have tracked the impact of the shadow market on apartment rents. We have observed that in instances where apartment rents meet or exceed shadow market rents, apartment rents often appear to drop below those of the shadow market (hence, the "Shadow Market Ceiling"). This is merely an observation we have noticed a number of times. Subscribers can see examples of this in the 2013 Q2 Twin Cities Rental Revue in the following sub-regions:
- Southwest Minneapolis (1, 2, & 3 BRs)
- Downtown St Paul (1 & 2 BRs)
- Apple Valley/Rosemount (3 BRs)
- Bloomington (2 BRs)
- Edina (2 BRs)
- St Louis Park (1 BR)
- Wayzata/Mound (1, 2, & 3 BRs)
- Woodbury (1 & 2 BRs)
On the flip side we have also seen a trend that when apartments are renting for significantly below the shadow market, there are often substantial increases in apartment rents. However, we have yet to see apartments rent above the shadow market in any sub-region (the ceiling!) for a length of time. Among other factors, evaluating the shadow market ceiling can inform where you set rents at your properties.
The passing of the 2nd quarter marks significant developments in the Twin Cities rental market . Most notably, apartments now represent the majority of openings. For perspective, consider that in the 2nd quarter of 2012 there were 6,800 apartment openings listed. In Q2 2013 there were 12,000.
Apartment & Shadow Market Openings: 2012 Q2 - 2103 Q2
Despite this surge in openings, apartment rents still went up across the region. One-bedrooms were up 3%, two bedrooms 8%, and three bedrooms 4%. However, some sub-regions that have seen a lot of new construction, and had rents above the shadow market, did see a drop. One example is apartments in Uptown . We will continue to track rental market trends in our quarterly report, Twin Cities Rental Revue .
A trend we have our eyes on is the shrinking shadow market. Since we started tracking Twin Cities rental market data in 2011, the shadow market consistently made up 60% or more of twin cities rental listings. However, the last two quarters it has made up 55% and 52%. Possible explanations to this trend are the improving real estate market, with more people opting to sell their homes than rent them out, or the fact that shadow market rentals turn over less frequently than apartments.
A recent national survey of renters (single family and multi-family) by Premier Property Management out of Memphis, TN showed some interesting findings. For example:
- 52% of all rental units in the U.S. are single-family homes, housing 27% of renters.
- Most, 3.6 million, were originally built for owner occupancy, but became rental when their owners lost them to foreclosure.
- Single family home tenants are 25% more likely than apartment tenants to stay in their current home five years or longer.
In the past two quarters in this report, we have started to see an interesting development with three bedroom apartments in the suburbs. In a number of cases rents are declining year-over-year (many times by 10% or more!) when the median rent for a three bedroom apartment a year ago was higher than a three bedroom shadow market rental in the same region. Examples of this trend in this quarters report:Blaine
Inver Grove Heights/Mendota/Lilydale
Last quarter it happened in:
Inver Grove Heights/Mendota/Lilydale
The result of the declining apartment rents are that in most cases the rents are “corrected” to the place where three bedroom apartments are less than three bedroom shadow market units.
This trend may also present an opportunity for apartment owners and managers of three bedrooms throughout the Twin Cities suburbs. There were a number of regions where three bedroom apartments a year ago were renting significantly lower than three bedroom shadow market rentals. This allowed for substantial rent increases. Examples of this trend in this quarter's Twin Cities Rental Revue:
Bloomington (up 17.6%)
Chaska (up 15%)
Coon Rapids (up 6.7%)
Fridley/Columbia Heights (up 9.2%)
Hopkins (up 17.4/%)
Minnetonka (up 16.3%)
Roseville (up 19%),
This demonstrates the importance of tracking shadow market rents to help determine whether or not you can expect or plan for rent decreases or increases in specific regions. For those not currently subscribing to Twin Cities Rental Revue, go here for more information so you aren't missing out on this vital rental market data, or email firstname.lastname@example.org.
In the apartment market:
One bedrooms remained flat ($711)
Two bedrooms were up 1% ($900)
Three bedrooms jumped 5% ($1,260)
In the shadow market:
One bedrooms rose 6% ($850)
Two bedrooms rose 2% ($1,125)
Three bedrooms rose 2% ($1,325)
Things get much more compelling when you look at individual areas. Consider southwest Minneapolis apartment rents:
Two bedrooms were up 36% over the previous year! ($1,350 compared to $995)
Three bedrooms were up 11% ($1,500 compared to $1,350)
To put that in perspective, over the course of a year, the median rent for a two bedroom apartment in Southwest Minneapolis went as high as the median rent for a three bedroom just one year earlier. Wow.
While apartments remained strong throughout Minneapolis and St. Paul, rents declined in many suburbs. This was likely due to shadow market pressure. Consider Plymouth: Two bedroom apartments in 2011 Q3 were $1,117, but dropped 11% to $995 by Q3 2012. Three bedroom apartments in Plymouth had a similar story. In 2011 Q3 they were $1,600. In 2012 Q4? A 15% drop to $1,358. How did that happen in this rental boom? It is likely the impact of the Shadow Market.
For the past year, Shadow market (largely single family homes and townhomes) three bedroom rentals in Plymouth hovered around $1,600. With a greater number of shadow market openings to choose from among both two and three bedrooms in Plymouth, apartment rents couldn't keep pace with the single family home, townhome, and condo rentals (and inventory) in Plymouth.
Similar stories played out in other suburbs (particularly with three bedroom rentals) like Eagan, Eden Prairie, Edina, Hopkins, Inver Grove Heights, Lakeville, Maplewood, Minnetonka, St Louis Park (two bedroom rents impacted in this case), Wayzata, Mound, and Woodbury. In each of these areas the shadow market appeared to put a ceiling on apartment rents, causing year-over-year declines.
This shows the importance of gaining insight into shadow market rentals in the areas where you have properties. Thanks for subscribing to the MADACS award winning Twin Cities Rental Revue!