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Feb 28, 2022

It’s not just the Twin Cities: Investors attracted to entire state’s commercial real estate market

February 25, 2022
By Dan Rafter


The Minnesota commercial real estate market remains an attractive destination for investors. And while much of this investment activity is centered in the Twin Cities itself, Minneapolis and St. Paul aren’t the only municipalities drawing investor dollars. No, investors are sinking their money into commercial real estate across the state, as one recent transaction proves.


Multifamily investor Northland has made its entrance into one of these markets, Rochester, Minnesota, about 86 miles from Minneapolis, acquiring SoRoc on Maine, a 186-unit garden community spanning three three-story residential buildings.


Mike Campbell, associate vice president of acquisitions with Newton, Massachusetts-based Northland, said that the company each year canvasses the country for secondary and tertiary markets that boast strong demographics and equally strong public/private partnerships.
This search put the Minneapolis-St. Paul area, and any communities within an hour-and-a-half drive or so, on Northland’s radar.


Campbell said that Rochester made sense because of its strong demographics, stable employment base and busy downtown area.
And there’s affordability. Northland prefers to invest in multifamily properties in which the rents are affordable to most nearby potential tenants.


“Affordability is huge for us,” Campbell said. “To know that residents in the market are comfortably able to afford the rents is important for us. That doesn’t always happen in some of the higher-cost markets in the country. The markets we look for are ones in which residents aren’t overburdened by rents.”


SoRoc on Maine itself was attractive to Northland, too, Campbell said. The property has undeveloped land adjacent to it, land that Northland plans to develop with 160 to 200 more apartment units, all of which will be part of an expanded SoRoc on Maine.


The hope is to start this construction within a year of acquiring the property, Campbell said.


This isn’t the first time that Northland will take such an approach. Campbell said that the company purchased a multifamily property in Santa Fe, New Mexico, that also had a small parcel of adjacent land. Northland built new units here, too, also incorporating them into the existing apartment complex.


Each of the existing buildings of SoRoc on Maine offers studio, one-, two-and three-bedroom units. SoRoc on Maine also boasts a variety of indoor and outdoor amenities. This includes a central green and pond, a pool, hot tub deck and bocce ball court.


SoRoc on Maine also benefits from its strong location. The apartment complex is near downtown Rochester, home to the headquarters of the Mayo Clinic and 3 million square feet of office and data center space for IBM.


Campbell said that Northland plans on investing in additional multifamily properties in Minnesota.


“Our ultimate goal is to establish a foothold in an area,” Campbell said. “We like to build a portfolio of units within a close radius of the existing properties we hold.”


Northland owns and operates a multifamily portfolio that includes more than 26,000 units across the United States. The Rochester acquisition adds to Northland’s portfolio of long-term markets within New England, Austin and the Southwestern and Southeastern United States.


Campbell said that multifamily properties consisted of 99 percent of Northland’s portfolio before the pandemic. That focus has only accelerated since COVID-19 hit, he said.


“Despite an influx of capital into the space and very aggressive and elevated competition, multifamily continues to be our bread and butter,” Campbell said.


Why has multifamily remained such a favored asset class for investors? Campbell said that the supply of single-family homes remains low, something that is sending more people toward apartments.


“We have almost four generations of Americans competing for the same housing now,” Campbell said. “The stock is very limited. Rentals continue to be an option for those who haven’t been able to buy. That seems to be pervasive regardless of market across the United States. For now, we don’t see that trend changing.”


Then there are the number of new investors moving away from assets such as office and retail, product types that have been hit hard by the pandemic, and putting their dollars instead into multifamily.


“Multifamily is more inflation-proof,” Campbell said. “It offers better risk-adjusted returns. It provides some predictable cash flow in otherwise uncertain economic times.”