Encore - 935 2nd Street South

[Tyler]

Sherman is moving forward with apartments here.

11 stories
121 units
Expected rents $1800-$6000
Building quality similar to Zenith (both exterior look and interior layout/design)
Walk up first floor units. No commercial.

Mod note: Sherman previously pitched 150k square feet of Class A office for this site. Find that locked topic here: https://forum.streets.mn/viewtopic.php?f=13&t=198

[min-chi-cbus]

Sherman is moving forward with apartments here.

11 stories
121 units
Expected rents $1800-$6000
Building quality similar to Zenith (both exterior look and interior layout/design)
Walk up first floor units. No commercial.

Fun news!

Where did you get this information? Do u know when a rendering may become available? Any Retail on the side facing the street? Those high-end rents are astronomical, but if you assume 12 units per floor then perhaps only one unit is $6k and it'd be an entire floor.

Thanks!!

[SixOneTwo]

From what I have heard, this will be called the Encore and they hope to start work on it this Fall. Retail is still a possibility, but they haven't found a tenant yet.

[John]

This is good news. In a sense it sounds like its actually being built to be a future condo conversion as market conditions improve.

[twincitizen]

http://www.startribune.com/housing/263573251.html

[GrowMPLS]

Anyone seen a rendering?

[mattaudio]

I just don't understand how some folks expect new construction downtown to include affordable housing. It seems like such an inefficient and expensive way to build out affordable housing, an idea rooted more in abstract concepts of equity and not as much in the real economic choices that would most greatly benefit progressive ideals. We'd have better outcomes if we just pushed for as much new construction as the market will bear, and slightly older units will thus have even further downward pressure into affordable territory for more residents.

[nickmgray]

I really wish they would reconsider their stance on retail or at least put in a small restaurant. From what I've observed, this area has been doing really well with small restaurants during the week and weekend. With the new stadium, hotel and more residents moving into the area over the next few years, demand should only increase.

Why is it that developers don't think about great spaces for restaurants? I'd love to sit at an outdoor patio right across the Gold Medal Park for some food before walking a block to a show on Friday night.

[EOst]

I just don't understand how some folks expect new construction downtown to include affordable housing. It seems like such an inefficient and expensive way to build out affordable housing, an idea rooted more in abstract concepts of equity and not as much in the real economic choices that would most greatly benefit progressive ideals. We'd have better outcomes if we just pushed for as much new construction as the market will bear, and slightly older units will thus have even further downward pressure into affordable territory for more residents.

I think most people are gambling (probably rightly for the moment) on the idea that the luxury rental market is just going to keep expanding for a while, so those older apartments won't come down for a while.

That, and encouraging mixed-income housing is a worthy goal in and of itself.

[John]

I just don't understand how some folks expect new construction downtown to include affordable housing. It seems like such an inefficient and expensive way to build out affordable housing, an idea rooted more in abstract concepts of equity and not as much in the real economic choices that would most greatly benefit progressive ideals. We'd have better outcomes if we just pushed for as much new construction as the market will bear, and slightly older units will thus have even further downward pressure into affordable territory for more residents.

In a way your comments reminds me of some kind of "trickle down " economic theory, however, I think it really makes sense and you are spot on. It may especially help moderate income people working downtown to have better access to decent housing in the urban core.

[acs]

I just don't understand how some folks expect new construction downtown to include affordable housing. It seems like such an inefficient and expensive way to build out affordable housing, an idea rooted more in abstract concepts of equity and not as much in the real economic choices that would most greatly benefit progressive ideals. We'd have better outcomes if we just pushed for as much new construction as the market will bear, and slightly older units will thus have even further downward pressure into affordable territory for more residents.

In a way your comments reminds me of some kind of "trickle down " economic theory, however, I think it really makes sense and you are spot on. It may especially help moderate income people working downtown to have better access to decent housing in the urban core.

I think the outcry against luxury downtown and for affordable housing is more rooted in suburbanites still seeing the inner city as where the poor people should be. They simply don't want to take their fair share of affordable housing units.

[uptowncarag]

I just don't understand how some folks expect new construction downtown to include affordable housing. It seems like such an inefficient and expensive way to build out affordable housing, an idea rooted more in abstract concepts of equity and not as much in the real economic choices that would most greatly benefit progressive ideals. We'd have better outcomes if we just pushed for as much new construction as the market will bear, and slightly older units will thus have even further downward pressure into affordable territory for more residents.

In a way your comments reminds me of some kind of "trickle down " economic theory, however, I think it really makes sense and you are spot on. It may especially help moderate income people working downtown to have better access to decent housing in the urban core.

I think the outcry against luxury downtown and for affordable housing is more rooted in suburbanites still seeing the inner city as where the poor people should be. They simply don't want to take their fair share of affordable housing units.

Interesting. I view the suburbs as just the opposite and truthfully can't imagine living there.

[FISHMANPET]

I just don't understand how some folks expect new construction downtown to include affordable housing. It seems like such an inefficient and expensive way to build out affordable housing, an idea rooted more in abstract concepts of equity and not as much in the real economic choices that would most greatly benefit progressive ideals. We'd have better outcomes if we just pushed for as much new construction as the market will bear, and slightly older units will thus have even further downward pressure into affordable territory for more residents.

In a way your comments reminds me of some kind of "trickle down " economic theory, however, I think it really makes sense and you are spot on. It may especially help moderate income people working downtown to have better access to decent housing in the urban core.

People see new expensive apartments that rent at luxury levels, and then they see existing apartments that renovate to become more upscale and raise their rents, and they incorrectly conclude that rents work the opposite of every other market priced good. I've seen frequent complaints that eventually rents will be so high that nobody will live in the buildings, and the conclusion these people draw is that all this new construciton will just sit empty at high rents rather than lower rents until people want to move in.

I've thought of a little analogy, and maybe some other people can let me know if it 1) makes sense, 2) is correct, and 3) most importantly, conveys the message that apartment rents are based on demand, not supply.

Imagine a new apartment building. If you "rent" a unit there, the management company will pay you a billion dollars a month. There's no strings here about you have to live in it or do X or why or whatever. You merely sign a lease exactly like you would for any other apartment, except instead of agreeing to pay $1000 a month, you agree to be paid a billion dollars a month
note: There's nothing that requires you to live in an apartment you rent. I could rent a hundred apartments all over town and just leave them empty, but that's stupid because that costs a lot of money. But the point here is that I'm trying to disconnect any notion of the actual location of the building, because you don't have to live there).
Now you can probably imagine that literally everybody in the world would want to "rent" this apartment, but there are only, say, 200 units. So the demand is 7 billion people, but the supply is only 200 units.

Now imagine another apartment, except to rent there you have to pay a billion dollars a month. Not even Bill Gates (I believe he's still the world's richest person?) would want to rent there, as he'd wipe out all his money in just a year or two. So demand here is 0, but the supply is still 200 units.

note: Here we establish that there is an amount of money where nobody would rent an apartment. Now let's find some middle ground
Now, let's go back to that first example, where you get paid to rent. Let's imagine that instead of being paid a billion dollars a month, you only get paid a million dollars. That's still a great deal, and almost everybody will still want that, but there will be a handful of people to whom it's not worth it. The administrative overhead of signing the lease and getting the keys etc etc would not be worth it, but realistically we're only lessening demand by a few hundred people. But think now you get paid $100k, a few less people are interested. Now $1000. For the vast majority of people that's still a great deal, but again, it's a deal to fewer people than a billion or a million or hundred thousand. Now let's imagine it's free. There's no profit to be had in "renting" it. So now it's only of interest to people that can actually use it. Maybe somebody would live in it, or maybe somebody would just use it as a crash pad or storage in a different part of the city. At this point I'd say we've limited demand to the tens of thousands. But supply is still only 200 units.

OK, back to the second example. If you remember, nobody would rent the apartment at a billion dollars a month. How about a million? Maybe a handful, if the unit and location is absolutely great. How about $100k? Still a handful? Now $10k. There houses in LA that will rent at that level, and probably plenty of units in NYC that will rent for that level. But here in the Twin Cities, maybe only a couple of people would be willing to pay that in any particular apartment building. So let's say at $10k a month demand is 5, but supply is still 200.

It stands to reason that somewhere between free and $10k per month, there's a dollar amount where only about 200 people will be interested in the apartment, which is great, because there are 200 units. Whatever dollar amount that is, that's what the building will end up charging, because it's the highest rent they can charge while still filling all the units. Any higher, and they have empty units which aren't generating any rent, and any less and they're just leaving money on the table (why charge less when you can charge more? For profit developers aren't charities).

The average rent in the Twin Cities for a two-bedroom apartment is around $1000, so let's call it an even $1000. As demonstrated above, there is a price such that the number of people willing to pay it is pretty equal to the number of units at that price. I think looking at average rents, we could say that for a particular building $2000 might be the price where supply and demand match up. But maybe the building only needs to charge $1500 a month to cover expenses (maintenance and repaying loans/investors). So that's $500 a month per unit going to greedy developers. A new building opens up next door with another 200 units, and they also charge $2000. But there are only 200 people here that want to pay $2000 a month for an apartment. But maybe there are 400 people willing to pay $1800, so the rent becomes $1800 a month. Another building opens up, and 600 people are willing to pay $1600.

But what if the second building didn't open up? Imagine next door an older building. There's nothing wrong with it, it's just kind of boring. It's got white appliances and laminate countertops, etc etc. It doesn't have a huge pool or rooftop patio or party rooms to rent out. Rent is $1000 a month here, right at the average. The only of this building sees the new building next door rent for $2000 a month. He knows he can't get that much, but if he puts in some stainless steel appliances and granite countertops, maybe he can charge $1500 a month. But imagine an older building in the same condition near the 4 new buildings each rent for $1600 a month. It's going to take a lot more than new appliances and countertops to make his apartments worth $1500. In fact, it'd probably cost him more to renovate than he would gain in increased rent, so he doesn't bother. He keeps the apartment well maintained with new counters and appliances on a regular schedule, but he doesn't splurge, and leaves rent at $1000. Maybe he'll raise it to $1100, it's still a good deal in the neighborhood.

So there are few points here. First, a landlord is generally not going to rent an apartment at such a high price that the building can't be filled, and he's not going to charge less than people are willing to pay. Second, the conventional wisdom that new apartments raise rents is the opposite of what actually happens. When supply is limited, new construction could raise rents, if existing landlords see demand for nicer apartments. If supply keeps up with demand, and that demand is met with new units rather than improvements on existing units, the existing units won't raise their prices. Finally, a little prolouge to this story. These 4 new buildings that we have now. In 40 years they'll be pretty old, and by then even newer buildings will have been built. These now 40 year old buildings become the older more affordable units, because it's not possible for them to keep up with the brand new apartments being built with matter energy transport elevators and food replicators in the kitchen. So they don't bother, they put in laminate counters and white appliances and charge an average rent.

[talindsay]

One small point: in your hypothetical, if there are 120 people who will pay $2000 but there aren't 200 until the price drops below $1200 he is still better off letting 80 units sit empty. Of course, in that case what they really do is fill the 120 at the higher rate and then negotiate lower rents to 80 more people. But the challenge here is that sometimes it really is better to let a bug share of the units sit empty, rather than dilute the profitability of the rented units.

[mattaudio]

In general I think the analogy holds, but with two caveats:

- In the age of the Internet, pricing strategy has changed because there's increase market transparency. If someone gets a deal on rent for one unit, there's a decent chance everyone will find out and demand the same thing or else feel they're getting the shaft. It's sort of like the Chinese tradition of handshake signals to negotiate a price so that others can't see/hear it.

- Tax code and accounting practices sometimes give businesses greater incentive to let capital sit fallow for a time in order to get writedowns on their books.

[min-chi-cbus]

Maybe you covered this in your (very well thought out) scenario, FISHMANPET (bravo, btw!), but when a developer pitches 200 additional units to add to a city of 400K+ and a metro of what -- 3.5M now? -- along with vacancy rates below 3% metro-wide (give or take a percent or two depending on the micro area), the demand may be thousands or tens of thousands of units, and this additional 200-unit supply is not the only game in town. If this is so why doesn't the project fill up immediately? LIke you said, maybe another project nearby is pitching another 200 units, or 400 units, or whatever. According to Mary Bujold of Maxfield Research, there's 2,000 units being constructed right now in the entire city of Minneapolis (she's way off by the way -- it's closer to 6K -- so maybe she has a different set of parameters and it's not actually the whole city she's considering with that figure), and there's a 3% vacancy rate within the existing supply. How many people are expected to demand units, and when? What price SHOULD be set as a result of what we "know"?

The price at which an owner will ultimately charge is what he thinks the market will command based on previous history and similar buildings in the area (basically appraisals). Appraising is a botched science for sure, but it's the best we have in such a dynamic and complex marketplace and it provides a starting point that's close to what effective rents will be (kinda like how Vegas sets the over/under for sports lines). There is simply no real way to KNOW the exact amount lessees are willing to pay for your new unit of space until they're built and part of the marketplace. Thankfully, landlords are allowed to adjust their prices if they so choose, so they don't have to stick to a certain rate if they don't want to. I'm not sure how it works with new units, but with older ones the rates seem to adjust annually per unit, or as a lease expires -- which, if the building is large enough maybe there's a transaction nearly every single business day of the year, so let's assume the LL can adjust prices daily for the sake of argument. But those adjustments occur a unit or two at a time per day, at the fastest, and the building is already leased up (or close to it, ideally). Regardless of what the developer/LL THINKS, rent will be what the marketplace wants for a given level of supply. If he charges $2.00/SF he may fill up the building at a 90% occupancy level, and if he charges $1.50/SF he may fill it up nearly 100%, but there is no rule that says that the cost/SF and occupancy% are linear/perfectly correlated, and the owner may make more by charging $2.00/SF with 10% vacancy than he would by charging $1.50 with no vacancy, as there may not be as much "linear" demand at say the $1.75/SF level (but we can assume a linear relationship between price and demand). The name of the game isn't necessarily filling every unit (that's certainly ideal), but maximizing profit (particularly revenue) in a given marketplace. IF that marketplace will only provide let's say $1.75/SF effectively, it doesn't matter how the owner comes to that average, as long as he gets as close as possible. Going back to the Vegas example, they can fluctuate the lines as people prefer either "over" or "under" and the goal is to get as close to 50%/50% as possible so all they're effectively doing is charging the "rake" -- or interest -- and not taking a stance on the outcome itself. It seems though that fluctuating prices up is harder to do than lowering them, since the goal is to fill up the building (and there is no goal to vacate everyone).

MY theory is that rents -- especially for new buildings -- are always overpriced in the short-run because it's much harder to adjust prices UP than down. That is, even if the owner COULD raise rents, if demand were high enough people would fill up the spaces so fast it could be 50% leased before a move is made or before he realizes he can charge higher rents. This isn't true on the flipside, when the building isn't selling anything and the owner gradually lowers rent until people start biting (unless the goal was 100% occupancy and not profit maximization). In that instance the developer is ALWAYS receiving the maximum price for every unit that is in demand, and in the former scenario many people may rent units at prices well below their true peak price. So it's best to aim high and adjust accordingly (if possible).

Ergo, the market averages are also over-inflated, especially when new supply is at peak levels (like it is today). The TRUE price of rent is somewhere slightly below the mean/median being quoted.

[min-chi-cbus]

One small point: in your hypothetical, if there are 120 people who will pay $2000 but there aren't 200 until the price drops below $1200 he is still better off letting 80 units sit empty. Of course, in that case what they really do is fill the 120 at the higher rate and then negotiate lower rents to 80 more people. But the challenge here is that sometimes it really is better to let a bug share of the units sit empty, rather than dilute the profitability of the rented units.

Especially if the owner isn't receiving any (or low) margin on those cheaper units, but you'd think ANY rent would be better than no rent since the incremental cost of overhead is so minimal for every new tenant added. In many cases the developer is not the eventual owner of the building in the long-run (beyond its initial lease-up).

I'd really love to learn more about this aspect of the real estate business!

[FISHMANPET]

Yeah, I was thinking that fewer units at higher rent could be more net income than more units at lower rent, but I didn't do the math to see that in my example it actually worked out that way.

Anyway, I may actually have two stories there, debunking two myths. The first is that rents will be so high that nobody will live there, and buildings will just sit empty rather than rents go down. I've seen the same people that deride the price of new construction be upset when this new construction offers move-in incentives (a nice way to lower the rent for the first lease period and then raise it beyond that). The second myth is that new housing makes existing housing more expensive (supply side pricing, rather than demand side pricing). I could split the stories and make both of them stronger. The first is one I've been contemplating for a while, ever since someone said that Five15 in Cedar Riverside had caused rents at Cedar Riverside Towers more expensive. The second one just kind of came to be as I was typing the first.

[min-chi-cbus]

I think you're basically correct on both points.....I was moreso reinforcing your point than challenging it (FWIW), and then adding a wrinkle and new theory to it.

[Archiapolis]

I really wish they would reconsider their stance on retail or at least put in a small restaurant. From what I've observed, this area has been doing really well with small restaurants during the week and weekend. With the new stadium, hotel and more residents moving into the area over the next few years, demand should only increase.

Why is it that developers don't think about great spaces for restaurants? I'd love to sit at an outdoor patio right across the Gold Medal Park for some food before walking a block to a show on Friday night.

Two reasons why retail and restaurants are tricky. Retail is a gamble in this area in general and moreso if it doesn't have frontage on Washington. Developers HATE to see their spaces sit vacant. Restaurants are even more difficult because a "grease shaft" has to be planned in advance or you get HVAC appendages that are difficult to execute and are unsightly. The Walkway in Uptown has a lot of ductwork that I presume to be just such a vent. Mortimer's has a VERY tall vent stack so that fumes are released above dwelling units, etc. Grease shafts aren't cheap to build and eat up rentable space so it is a difficult pill for developers to swallow without a paying tenant in place. Lastly, City of Mpls parking requirements for commercial space are onerous. Parking requirements for restaurant space are even worse. Designing/building/paying for parking stalls (and securely separating them from dwelling units) is an expensive proposition that is not lightly taken up by developers. The answer isn't as simple as "active public uses at all ground levels!" Feel free to push back, I don't have all of the answers...