We have some exciting news here in Minneapolis. The city was ranked 10th in absorption in all of the US in Q3 of this year.
What does that mean exactly? Well, of all the new units developed this quarter, a majority of them were successfully absorbed into the market. Instead of remaining dormant.
This is a great sign of a thriving market, as it is an indication of the market’s supply and demand balance.
So, what does it mean for a city’s real estate market to have a high absorption rate? And what does that mean for Minneapolis?
Find out on this week’s episode of Multifamily Investing Made Simple, In Under 10 Minutes.
Tweetable Quotes:
“We live in a pretty moist market. We have absorbed as much as we can. We’re super saturated. It’s damp, it’s clammy. Great market to invest in though.” – Anthony Vicino
“So high absorption’s great, but you wanna keep an eye on it because as soon as it starts to be less great… that could be an early sign that there’s a, a turn coming.” – Dan Krueger
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*Transcript*
12-24-22
[00:00:00] Anthony: Hello and welcome to the podcast, Dan. Hm. Did you know that we live in one of the moist metropolitans areas in all of
[00:00:25] Dan: the country? I do now, and I think half of our listeners just turn this off a hundred percent because of your word choice. A terrible word choice, but it’s gonna keep happening. It is interesting,
[00:00:36] Anthony: like some people do have a very strong, visceral reaction to the word moist.
Mm-hmm. , I’m one of ’em. I giggle. It doesn’t stress me out, but some people are like, eh, but it makes me giggle.
[00:00:46] Dan: it ma it makes me feel weird if I’m like at like a, a dinner or something and there’s cake served and there’s always like some like kind of older mom or something that doesn’t, the best way to define a cake is moist.
It’s a really good thing to say because it’s [00:01:00] a, it’s a compliment. . Like old people don’t get it. It’s weird, but like I feel really uncomfortable. I don’t know why a hundred
[00:01:06] Anthony: percent. Yeah. Just tell me, just tell me the cake was juicy. Hmm. You got some juicy. , that’s a juicy cake. Yeah. Juicy
[00:01:12] Dan: is fairly meat, right?
[00:01:13] Anthony: Juicy is a weird one too. Yeah. Like
[00:01:16] Dan: I don’t get weirded out, but I’m, it doesn’t feel right for cake. There was a
[00:01:19] Anthony: psychological study that shows like how men and women react to different words, and two of the words that they used was to say, which makes you, uh, which word do you dislike more moist versus used men.
Tended to dislike the word moist. Hmm. More like at a very high rate more than women. And women disliked the word used much more than men. Hmm. Um, they, they had some like explanations of why they thought that was, but I always thought that was really peculiar.
[00:01:49] Dan: Yeah. I thought it was unanimous. Everybody hated moist.
I think
[00:01:51] Anthony: everybody does. It’s just that men rarely hate it. . So
[00:01:54] Dan: anyway, let’s talk, let’s just
[00:01:56] Anthony: keep saying it. Let’s, let’s explain why Minneapolis is one of the [00:02:00] moist. Metros in the city, in the country? No, it’s not that we have like a lot of rain. Well, we do snow a lot, but it’s not that. Dan, what, why are we so moist?
[00:02:10] Dan: Well, I, I guess it’s, it’s, uh, an assumption we made because we just found out that we were, uh, what was it, the 10th, 10th most absorbed market, which implies there must have been moisture to absorb out of absorption. Anyways, we’ll get rid of the moist thing. Um, we had the 10th best absor. in the
[00:02:30] Anthony: country in Q3 2022.
Boom. Yeah.
[00:02:33] Dan: Very specific point in time for, for Q3 2022, we had the 10th best absorption out of any market, which means, uh, new construction that’s coming online. When those units are leased, they are absorbed into the market. They’re producing revenue and they, they’re absorbed. So absorption’s,
[00:02:49] Anthony: good, absorption’s, a really good num, um, metric that people look to, to see how strong is a market in terms of its supplied demand.
If you, if you, if you don’t have strong absorption, it [00:03:00] might mean that you’re overbuilding. and you don’t maybe have enough demand for it. Yeah. The extreme
[00:03:04] Dan: example would be like, uh, China where they build completely vacant cities, like that would be zero absorption. That’s bad absorption. Yeah. That’s just like building for the sake of building.
[00:03:12] Anthony: And, and what’s interesting about absorption is typically you would think, okay, this is gonna be in like the really, really hot cities. Mm-hmm. , I think Houston maybe was on there. Um, maybe Nashville too. So like some, there’s a lot of like southern south, um, Cities in there that you would expect because high population growth, typically the builder’s gonna go and they’re gonna build a lot and usually mm-hmm.
you know, they’re gonna fill it up. Um, so it might come as a surprise then that like Minneapolis, um, I believe, was it Madison? There was another Wisconsin, there was a Wisconsin. Didn’t see the rest list. I’m just looking and Omaha. Okay, so three Midwest cities. Yeah. Boom. Uh, I think Omaha is number three on the list.
Minneapolis is number 10. So it might surprise people because you might not think of these markets as like high growth, and so you’re like, wait, why? Why is there such high absorption going on? Mm-hmm. , which kind of tied into like, another thing I wanted to talk about today with [00:04:00] Minneapolis in particular is that the reason I think that we have such high absorption is we’re, we’re one of the most supply constrained cities in the country.
[00:04:09] Dan: Yeah. And that’s, I mean, that’s a good thing for, uh, people who own properties. That just means, yeah, it means that there’s less coming online, less competition. Um, and it’s also outside of our little, you know, pocket here. You know, why does absorption matter? It’s, it’s one of the earlier, uh, signals that there could be a, uh, a ch uh, a change in the market.
Meaning if you’re building a bunch of stuff and it’s getting absorbed super quick, one of the first things you’re gonna see change before some sort of downturn is the absorption’s gonna slow. and then you’re gonna enter into the territory of, um, oversupplied where you start to see rental prices come down and all the prices start to come down.
So high absorption’s great, but you wanna keep an eye on it because as soon as it starts to be less great that it could be an early sign that there’s a, a turn coming. Mm-hmm. .
[00:04:53] Anthony: Yeah. Something else to, to, to think about here when you’re looking at these reports, cuz this one came from Arcadia and you got a, an article here from Finance and [00:05:00] Commerce where they talked about.
Um,
[00:05:02] Dan: I’m sure there’s sight. I think it’s probably all coming from that one Briad start probably, but they didn’t give the other, um, top 10 in this. They’re just talking about Minneapolis or, or our metro.
[00:05:12] Anthony: Yeah. Another thing to think about though is as you’re looking at all these different reports, sometimes you’re gonna get some conflicting information and you have to kind of, you have to figure out how to rationalize it.
So what I mean by this is, there was a, there was one of those groups, Marcus and Millichap or I r something like that. This came out a couple months ago. And you know how they have like this dial. where they’ll show like all these major metropolitan cities and they’ll say like, this one’s in hyper supply and hyperinflation, or this one’s in kind of like a Yeah, I think it’s IRR
[00:05:37] Dan: that has that one.
Is
[00:05:38] Anthony: that one that circle? Yeah. So usually Minneapolis and Twin Cities are sitting in the kind of like, um, like way under, um, supplied side of things. Mm-hmm. and the most recent one, they had us as being right on the cusp of being oversupplied. And I was like, well that doesn’t make any, So sometimes you see the, some things where you’re like, I don’t quite understand where that data came from.
Um, cuz it would [00:06:00] fly in the face of this and fly in the face of what we see boots on the ground here. But, um, I wonder when that was
[00:06:04] Dan: from though. That was a couple months ago, but was it from like last year? Oh, I don’t know. Because I think IR comes out, uh, you know, kind of like mid-year and it’s always looking at like the prior year.
So it might have been looking like a year in the past, which. Yeah. That’s, that’s still
[00:06:19] Anthony: surprising though. Cause in 20 22, 20 21, uh, I mean, nothing’s fundamentally changed in twin Cities. All I’ll has to say is that like, you look at these reports and it’s good to keep a finger on the pulse, but always just remember that like, these are just snapshots in time.
Yeah. And
[00:06:33] Dan: stuff. Well, I mean, part of the reason, like, uh, the point you made earlier about the run control thing, like. That’s something that’s been happening for about the last year and a half in our area. And that’s turned off a lot of, uh, developers and, and builders, because at least in St. Paul, when that initially got passed, it included new development.
So there becomes no incentive to deliver new units. That’s, which,
[00:06:53] Anthony: that’s a really good point to actually, yeah. Yeah. St. Paul, um, I think we were talking about this off the air, so listeners might be a little bit confused, but [00:07:00] re if you don’t know that one of our, one of the cities in the Twin Cities has rent.
And went into effect in 2021 and it effectively just shut off the faucet. Um, all developers in the city were like, well, we’re just gonna stop all building cuz why would we? Um, so until they get that figured out, we’re gonna remain very supply constrained, which means for us as owners of preexisting buildings.
Cool.
[00:07:24] Dan: Yeah, I mean, it’s great for us for, I mean, we had, I think they, they had a kick in in May and then it was back in November. So there was really only. Handful of months where it was like fully in effect for 3%. Then they said it was, I can’t remember what exactly it is now. It’s CPI plus something.
Effectively, when somebody moves out of a unit, you can bump the rent, you know? 12, 15% or something, which is, which is great, is fine. So it’s, it’s actually a really great situation for us because it’s still gonna be, uh, kind of scaring off a lot of new development, a lot of new units coming online. So we’ve got this extremely fixed supply.
Demand has not gone down at all. So all the people that [00:08:00] already have properties, um, you know, you’re in a really good supply demand situation there where demand is the same slash increasing and supply is pretty well fixed. So,
[00:08:11] Anthony: so also today is, uh, yeah, we, we live in a pretty moist market. We have absorbed as much as we can.
We’re super saturated. It’s damp, it’s damp, , clammy. Great market to invest in though. Just make sure you bring your, um, What are the boots that people wear? So, galoshes. Colos. I was gonna say baklava. And I was like, that’s certainly not right. . So. Well, we appreciate, we appreciate you guys, uh, putting up with our shenanigans.
We’re, we’re recording on a Sunday today, which is a little bit different than our usual, so we’re not in our regular flow. We’re a little bit, we’re on, we’re bringing the weekend
[00:08:43] Dan: energy. Yeah. She’ll be on the couch right now. That’s where I spend Sundays. Yeah.
[00:08:46] Anthony: What are we doing here in the C office? We’re putting out, we’re putting in the work.
That’s what this. So if you guys enjoyed it, if you appreciated it, do us a favor, leave us a review. If you didn’t, if you’re like, guys, seriously. Next time, don’t, um, you let us [00:09:00] know that too. Sorry about the word usage. Yeah. Please forgive us. We, we’ll probably, we probably won’t use it in.
