Local trends show the Minneapolis-St. Paul region’s overall vacancy rate was 5% in the fourth quarter of 2024, down from 5.3% the prior year, according to Marquette Advisors. Southwest and Downtown Minneapolis, adjusting to new supply, recorded higher vacancies, but were expected to “rebalance” within 12 to 18 months.

The metro-wide average rent was up 4.4% year over year in the fourth quarter of 2024, according to Marquette Advisors, but remains affordable compared to many major U.S. cities.

“Minneapolis is very stable,” Felsot said. “It’s home to more than a dozen Fortune 500 companies, which is a nice driver for the local economy and job formation, and the lifestyle and affordability is a major draw.”

Elevated interest rates

The Federal Reserve paused anticipated rate cuts in early 2025 after initial easing in late 2024. Further reductions hinge on inflation trends and labor market conditions, as well as emerging policy moves from the new administration in Washington.

“The market appears to be accepting a new normal for interest rates rather than holding out for a return to the 4% range, because we don’t know if those days are coming back,” Felsot said.

While higher rates present challenges for highly leveraged multifamily investors, particularly those with variable rate loans, opportunities exist in any market cycle, Felsot said. 

Investors seeking or refinancing apartment loans may want to explore flexible loan structures that can accommodate future rate movements.

New transaction activity

Cap rates have adjusted upward with interest rates, contributing to a dip in Minneapolis multifamily property values. The deepest decline was in March 2024, when prices were roughly 25% to 30% below the all-time highs of 2021 and early 2022, according to CoStar.

Transaction volume is picking up, however, as out-of-state investors recognize opportunities to purchase properties below replacement cost, Felsot said.

“That has a positive, stabilizing effect in the market,” he said. “It puts a floor on values, especially when it comes to big-ticket properties, where you have fewer buyers doing deals at scale.”

Apartment floor plan updates

Planning a renovation? Consider space utilization strategies, particularly in older buildings where original layouts may not align with current renter needs, Felsot said.

A formal dining room, for instance, may be more attractive to renters when transformed into a larger kitchen with a breakfast nook, a home office or an extra bedroom.

“We’re seeing owners get creative with space planning to make sure their units’ layout fits what renters are looking for,” he said.

Managing Minneapolis utility costs

Minneapolis multifamily investors seeking opportunities to lower utility costs may want to consider implementing a ratio utility billing system (RUBS). RUBS is a billing method that lets property owners allocate utility costs to individual units, even if units don’t have their own utility meters or submeters.

“It reimburses the property owner, at least partially, for overall utility costs,” Felsot said. “While market acceptance and regulations differ from location to location, it’s something that could be considered in higher-inflation environments.”

With RUBS, investors use factors such as the number of residents in a unit or the unit’s square footage to figure out what share of the property’s utility bill each unit’s residents should pay. There’s additional administrative work compared with including forecasted utility costs in a unit’s rent. But when utilities are included in rent, the property owner risks absorbing unexpected utility cost spikes during the lease term. RUBS helps align renters’ utility payments to actual expenses. 

A Minnesota law passed last year made significant changes to shared-meter utility billing regulations, so investors using RUBS or submeters should review their practices. Electricity charges billed separately from rent can’t be apportioned. Natural gas and water bills can be, but there are requirements for how charges can be allocated to units, plus regulations on billing transparency, late payment charges and payment plans.