Location, Location, Location. That's what you often hear when looking into real estate investing. Some locations can provide excellent cash flow while others offer huge appreciation. Choosing a location has a lot to do with what your goals are as an investor, and how you want your money to work for you. This post will give you insight into the Twin Cities, Fargo, and Sioux Falls markets. Each market presents its own opportunities for prosperous real estate investment.
Twin Cities Market Overview
Being one of the largest metros in the Midwest, the Minneapolis-St. Paul (MSP) area remains a significant player in the multifamily market, with a population of approximately 2.99 million and a modest year-over-year (YoY) growth of 0.78% as of 2023. According to Northmarq’s report, vacancy rates have slightly increased to 5.2% even with a growing population. Although vacancy rates have increased, average monthly rents have also seen an increase of 2%, reaching $1,510. Despite these upward trends in rent, the market has faced challenges, including a significant decline in multifamily sales, which was down over 50% from the previous year, and a decrease in sales price per unit by 30%, averaging $110,900. These factors have led to an increase in CAP rates, now ranging between 5.75% and 6.5%. Yet, the area has experienced a 2% employment increase, particularly led by the healthcare and social assistance sectors.
The Emerging Opportunity in Fargo-Moorhead
Contrastingly, the Fargo-Moorhead Area (FMA) represents a growing market with a population of 261,600 and an impressive 2% YoY growth. Forbes has recognized it as the best place to start a business for two consecutive years, signaling a vibrant economic environment. According to Goldmark, the FMA has a 6.97% vacancy rate for multifamily properties and a 9% increase in multifamily sales from 2022 to 2023, suggesting a healthy demand for rental properties. Rent prices for class B and C assets have barely increased over the last decade and are due for a significant increase of approx. 20%, which many operators have been able to achieve with minimal upgrades. The average price per door stands at $96,000, marking an 8% YoY increase over the past four years. The diverse employment sector, with a significant presence of large healthcare facilities, the second-largest Microsoft campus, and substantial AgTech employers contribute to a robust job market with only 1.7% unemployment. Furthermore, over 30,000 college students, many of whom remain post-graduation, add to the demand for rental housing. Fargo is also known for being landlord-friendly, which can ease the operational aspects of an investment.
Sioux Falls: A Steady Contender
Sioux Falls, with a metro population of 208,900 and a 1.7% YoY growth, is expected to expand by 10% over the next five years. Dominated by healthcare, financial services, manufacturing, and retail sectors, the economy is diverse and constantly growing. However, the vacancy rate has slightly increased to 5.87%, and despite a 42.3% decrease in building permits issued in 2023, the average rent for two-bedroom units has surged by 9.4% over the past year to $1,192. This will likely cool as new supply enters the market. This market is landlord-friendly and shows promise, but the imminent slowdown in rent growth and rising vacancy rates might present challenges.
Why Fargo-Moorhead Stands Out
FMA's combination of economic vibrancy, strong population growth, and increasing demand for multi-family units positions it as a standout market for real estate investors. The area's designation by Forbes as the best place to start a business not only speaks to its economic health but also to its potential for sustained rental demand, driven by a growing workforce and a significant student population. The diverse employment landscape, highlighted by strong sectors such as healthcare and AgTech, ensures a steady influx of residents seeking housing, thereby reducing the risks associated with high vacancy rates and ensuring stable rental income.
Furthermore, the consistent increase in multifamily sales and average price per door over the past four years signals a market that is not only growing but also appreciating in value. This trend is indicative of a robust investment environment where capital appreciation can complement rental yield, enhancing overall return on investment.
The landlord-friendly regulations in Fargo-Moorhead reduce the bureaucratic hurdles and potential legal challenges investors might face, making it easier to manage properties and adjust to market changes effectively. This aspect cannot be overstated, as it directly impacts the ease of doing business and the potential for maximizing investment returns.
Comparative Outlook
While the Twin Cities market offers the stability and infrastructure of a large metropolitan area, including a significant increase in employment opportunities, the current downtrend in multifamily sales and the reduction in per-unit sales price highlight the challenges within a more saturated and competitive market. Additionally, the increase in CAP rates, while potentially offering higher yields, also suggests a market adjusting to lower valuations, which could signal caution for immediate investment.
On the other hand, Sioux Falls presents a stable yet slower-growing alternative. The expected population growth and diverse economic base are promising, but the recent slowdown in building permits and the potential for increased vacancy rates and decelerated rent growth suggest a more cautious approach might be warranted.
Conclusion: The FMA Advantage
Considering the dynamic growth, economic diversity, and favorable investment conditions, Fargo-Moorhead emerges as a compelling market for multifamily real estate investment. Its growth trajectory, combined with a supportive business environment and demographic trends, presents a unique opportunity for investors looking to capitalize on emerging markets with significant upside potential.
As we continue to explore and evaluate the multi-family real estate landscape, Fargo-Moorhead's blend of growth, value appreciation potential, and investor-friendly conditions should place it high on the list for those seeking to diversify their portfolios and tap into the opportunities of tomorrow's leading markets.
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