Olmsted County poised for strong housing growth

 

 

Olmsted County, in partnership with the Rochester Area Foundation and the Mayo Clinic, commissioned Maxfield Research, a real estate consulting firm from Minneapolis, to conduct a comprehensive housing study for Olmsted County.   The purpose of the study was to understand the composition of the county’s housing stock and identify current and future housing needs for Olmsted County residents.  The report identified short- and long-term housing needs and provided recommendations to guide future housing development.   Findings will provide a basis for community leaders and decision-makers to guide policy and strategy related to housing needs.  Furthermore, the report will also streamline the development process for developers and builders while providing lenders the needed documentation to finance development.  

 

 

Baby Boomers driving housing demand in short-term

 

Demographic findings drive the demand for housing types which help identify future housing demand and pricing.  Olmsted County population and households grew strong the last decade despite the Great Recession and U.S. housing slowdown.  In fact, Olmsted County was one of the fastest growing counties in Minnesota over the past decade.   Although household formations slowed during the recession, Olmsted County still gained 9,790 households (19.1%) in the past decade which was more than 1,500 households than the 1990s.  Household growth is project to be strong over the next two decades as demand was found for over 22,000 new housing units through 2030.  

 

Baby boomers (those born between 1946 and 1964) will have the highest growth rates this decade and will begin aging into younger seniors.  This shift will result in demand for alternative housing products.  At the same time, non-family households are growing due to shifting demographics (i.e. delayed marriages, fewer children, aging of the population, etc.).   The Millennial generation (children of the baby boomers) is also expected to drive housing demand as this age cohort is projected to add over 3,300 persons over the next five years.  

 

 

Destination Medical Center (“DMC”) further enhances housing needs

 

The development of the Destination Medical Center (DMC) in Rochester is also expected to enhance growth and will exceed historic growth trends.  The goal of the DMC is to be a global medical destination.  U.S. News and World Report recently named Mayo – Rochester, the “Best Nationally Ranked Hospital”, an honor that will certainly assist in achieving this goal.  The DMC could contribute to an additional 35,000 to 45,000 jobs within Minnesota of which 25,000 to 30,000 would be direct new jobs from Mayo and the DMC development.

 

 

Employment growth fuels household growth and is the leading indicator of potential demand for future real estate development.  People generally desire to live where they work.  Olmsted County gained 9,300 new jobs within the last decade and has maintained a lower unemployment rate than the remainder of Minnesota (4.2% vs. 5.1% in MN in 2013).   Wages in Rochester and Olmsted County are significantly higher than many other large out-state Minnesota communities ($12k to $17k higher) and only slightly lower than the Twin City Metro area average ($52,416 vs. $55,952).  The median household income is among the highest in Minnesota (owner households = $82,800 vs. renter  = $42,900).  The lower unemployment rates and healthy wages indicate a higher potential demand for all housing products within Olmstead County.

 

 

Most of the household growth likely occurred during the first half of the decade.  Rochester accounted for 91% of the household growth within the study market area.  Maxfield Research projects that strong household growth will continue through this decade and the next, adding an additional 11,500 and 12,800 households respectively.

 

 

Rental Housing in Short Supply

 

Mirroring trends across the country, the Olmsted County multifamily rental market is tight.  The overall vacancy rate in Olmsted County is around 3.5%, even lower for affordable and subsidized rental products (about 1%).  A healthy rental market should have a vacancy rate of 5% to allow for consumer choice and turnover.  As a result, there is pent-up demand for rental housing across all price points and household types.    Because of this demand, developers are beginning to propose new rental housing supply, most of which are located in Rochester.  As of July 2014, there are over 1,200 general-occupancy and senior units in the development pipeline (under construction, proposed, or speculative).   A portion of the new product is luxury rental housing targeting Millennials and households in the health-care sector with hotel-like amenities that come with high monthly rents.   The low vacancy rates together with strong job growth will result in strong rental demand in the decades to come. 

 

 

Senior Living

 

Similar to general-occupancy rental housing, senior housing vacancy rates are also very low.  Overall, 2,600 units were identified across all senior service levels with a 3.5% vacancy rate.  Generally, a vacancy rate of 5% to 7% is considered equilibrium for senior housing.  Vacancy rates are even lower for affordable and subsidized units (0.9%).  Low vacancy rates, together with strong senior household growth; results in demand for more than 3,200 senior housing units through 2030.  Most of the senior product is targeted to seniors in need of services; hence there seems to be opportunity for active-adult and independent living senior products.  

 

 

For-Sale Market Rebounding

 

The for-sale market in Olmsted County has steadily improved since the housing downturn and this past year was pivotal for the housing recovery.   Home values peaked in 2006 ($174,000) before falling during the Great Recession; however as of June 2014, the median price was $165,375 and has increased annually since the 2009 low of $153,000.  Olmsted County housing values did not experience the peaks and valleys over the past decade like most communities and had a much more stable housing market through the Great Recession.  Key housing metrics have improved over the past year; foreclosures are down, pricing is up, days on market are declining, and closed sales are increasing.  However, housing inventory remains low and there is a shortage of homes on the market for some price points. 

 

The new construction market is improving; however the number of vacant developed lots is decreasing.  Few lots have been platted since the downturn and most of the newer platted subdivisions in Olmsted County are smaller in order to mitigate land holding costs.  The majority of new construction is built-to-suit with little spec housing.  New construction is generally priced about 15% less than the Metro Area and new single-family home sales prices average about $150 per-square-foot.   Additional lots will be needed to accommodate increased demand as existing lots are absorbed.

 

 

Need for Housing is High

 

The Olmsted County Comprehensive Housing Study found demand for more than 23,000 housing units through 2030.  Demand was apportioned as follows: 11,363 for-sale units, 7,704 rental units, and 4,244 senior units.  Although demand will be spread throughout Olmsted County, the majority of the demand (81%) will be in Rochester.    Given the low vacancy rates across all rental product type there is pent-up demand for new rental housing today across all income levels.   As the for-sale market continues to improve, additional lots will be needed to accommodate future demand.   Housing needs could be even greater based on the performance of the Destination Medical Center and the future economic development it produces.   Based on this demand, there will be an immense need for housing in Olmsted County.  

 

For a more detailed review of the Olmsted County Comprehensive Housing Study; please see the following link for the complete report. 

 

LINK REPORT HERE

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