Twin Cities apartment construction accelerates to highest level since 1980s

After tapping the brakes in 2016, apartment developers in the Twin Cities are shifting into overdrive.

Apartment building is expected to rise by more than 30 percent this year and reach the highest number of new units — 5,600 — in at least 30 years, a new market study says.

Nearly all of it will be in upscale buildings in the suburbs, where there's been little new apartment construction since the 1980s. Only 1 in 10 will be for low-income renters.

"I would like to see stronger production in the middle-market and affordable price categories, but it's harder to make these projects financially feasible," said Thomas O'Neil, who wrote the market study and is a vice president at Dougherty Mortgage in Minneapolis.

"We can really never build too much affordable housing and a variety of forces are pinching production this year," he said.

The construction boom comes at a time of growing concern that the rental market is saturated. A detailed analysis of where the development is happening, however, shows that apartment demand far outstrips supply in the metro area, especially for working-class families.

In Minneapolis alone, nine projects with 528 units are expected to be completed this year, mostly in the Near North, Northeast, Phillips, Prospect Park, Powderhorn, Longfellow and Nokomis neighborhoods.

At the same time, development in the first-ring suburbs is expected to peak this year with 1,113 new apartments, a 130 percent increase over 2016, and then spread into the second- and third-tier suburbs.

O'Neil said the competition for renters is already stiff in some submarkets where several larger projects have opened, or are about to, during the same leasing period. That includes the North Loop, near Northeast/St. Anthony, Prospect Park near the U, western Golden Valley/southeastern Plymouth, and to a lesser extent, downtown St. Paul.

In the Uptown neighborhood in Minneapolis, for example, developers are already taking a break. This year, just 286 new units in two projects are expected to come online in that market — a significant decline over last year And in 2018, the only project in the pipeline is a 110-unit building, making the area one of the slowest-growing submarkets in the metro.

After a brief pause, development has returned to neighborhoods surrounding the University of Minnesota, where a near-record 984 units are scheduled to be completed this year compared with just 33 last year, outpacing the 791 planned units in downtown Minneapolis.

The problem is there are too many units at the same high price.

"We still need overall housing production to keep pace with solid economic growth and new household formations," said O'Neil. "New units will come online in a wider variety of locations across the Twin Cities and a good number of projects should be able to lease-up with relatively little competition."

LaDonna Hoy shares similar concerns. She's the executive director of Interfaith Outreach, a Plymouth-based nonprofit that partners with apartment managers and developers to add more affordable housing and to provide on-site services to help at-risk families. Citing statistics that 55 percent of the Twin Cities' poor population now lives in the suburbs and that poverty in Twin Cities suburbs has grown three times faster than poverty in Minneapolis and St. Paul over the past 10 years, she says current development trends are unsustainable.

"This is a really critical issue for low-income families," she said.

Rent increases are outpacing wage growth and affordable units are disappearing as investors purchase those buildings, fix them up and reintroduce them at higher rents.

The "attrition rate" for these affordable units has spiked during the past couple years because of rising construction costs, including land prices and higher labor, are making it more difficult for developers to build apartments in the communities where the need is greatest. And there's growing concern that a shortage of tax-exempt bonds and low-income housing tax credits will stymie production of low-income housing even more in the coming year.

"This gives me great heartburn," Hoy said.

Owen Metz, vice president and project partner with Dominium, one of the largest apartment developers in the Twin Cities, said the firm has several deals in the pipeline, including some that are considered affordable to low-income families, but would do more if the financing environment were more favorable.

The company is poised to start construction on 400 to 500 units of affordable apartments and another 200 to 400 affordable units targeted at seniors.

The company is also working on the Upper Post at Fort Snelling to do family housing with a preference for veteran residents. That project, he added, "is very much at risk due to lack of availability of tax-exempt bonds."

Jim Buchta • 612-673-7376