Apartment construction has been booming in the Twin Cities, but is about to boom even more

Developers built nearly 24,000 apartments in the Twin Cities since 2010 in what's been seen as a booming market. But the action this year and next will blow all that away.

By the end of next year, builders will have completed another 13,000 units, chiefly market-rate and luxury apartments, in the metro. A much smaller number of income-restricted apartments will also get built.

It's an unprecedented pace that's likely to change the dynamics of residential real estate in the Twin Cities. An era of ultralow vacancies and steadily rising rents may come to an end.

"It's not going to be a crash, but it will be a normalization of the market," said Brenda Hvambsal, a vice president with Steven Scott Management, a St. Louis Park-based property management firm.

The arrival of so many new apartments this decade is a testament to the economic health of the region, which has a lower-than-national average unemployment rate and a growing population.

The number of apartments has grown 2.4 percent annually, the 24th-fastest rate among U.S. metro areas but well behind places like Denver and Charlotte, where apartment growth was 5 percent or more, according to RealPage, a technology and analytics company.

"It is an aggressive building pace by Minneapolis standards, but it's not over-the-top volume when you compare it to other spots," said Greg Willett, chief economist at RealPage.

The demand for more apartments in the Twin Cities is clear. For nearly a decade, the vacancy rate for market-rate rentals has been around 3.5 percent. That's tight; 5 percent is considered normal.

Tom Lund, a veteran developer whose latest project is the Hub, a 431-unit tower near the University of Minnesota and shown at left. It's larger than anything that will hit the market this year. Lund said that baby boomers and empty nesters are selling their houses and moving into upscale rentals with condo-quality finishes, enabling them to the test the urban lifestyle.

"The biggest surprise to me is the strong demand from nontraditional renters," he said. "My friends and neighbors are selling their homes and exploring urban living."

Though the homeownership rate recently posted its first increase since the recession, a shortage of house listings is stifling home sales, forcing many would-be buyers to rent instead. Last year, renters moved into 3,465 new apartments in the seven-county metro area — slightly more than were built — and nearly 1,000 more than in 2016, according to Marquette Advisors, a real estate consulting firm.

If renters continue to move into new apartments at a rate of around 3,000 units a year while new construction exceeds 6,000 units, the market's vacancy rate will rise to around 7 percent, said Brent Wittenberg, a Marquette vice president.

"A slowdown in absorption was in fact expected over the past several months but hasn't materialized," Wittenberg said.

Throughout the metro, demand for apartments has largely been fueled by job growth. The Twin Cities saw one apartment get rented for every 12.6 jobs added last year, a rate that was steady from 2016, Wittenberg said.

In recent years, much of the new apartment construction was concentrated in Minneapolis and St. Paul. But that began to shift to the suburbs last year, a change that will accelerate this year and next. Roughly half of the new units will be in the suburbs this year, but by next year that figure will rise to around 70 percent.

There's pent-up demand and less-expensive land in the suburbs, and competition for renters is heating up, said Thomas O'Neil, vice president of market development for Dougherty Mortgage LLC in Minneapolis.

That means that the first areas to experience the shift in the power dynamic away from landlords may be in downtown Minneapolis. This year, 1,300 units in eight projects are expected to open in the central city, a study by Dougherty Mortgage found.

The vacancy rate is already 4.8 percent downtown and could rise to about 9 percent by this time next year, Marquette's Wittenberg predicts. Downtown Minneapolis last experienced a pop in vacancies amid a flurry of construction in 2013 and 2014, when a surge to a 9.8 percent vacancy rate took about 18 months to rebalance.

But at the moment, downtown property managers are showing few signs of worry.

"We feel good about the current supply and market conditions," said Nick Murnane, director of real estate development for Opus Development Company, which is building the 365 Nicollet, a sleek 369-unit tower with one-of-a-kind amenities that's flanked by similar towers that have opened during the past couple years.

The company is closely monitoring showings and leasing patterns at its nearby Variant North Loop apartments, which opened in December.

"We are continuing to see great leasing activity in the North Loop," Murnane said.

Landlords around the metro have had to do little extra to woo tenants. One of the first signs of weakness in a market is free rent and other concessions, but they are scarce in the Twin Cities.

RealPage shows that rent discounts were offered on only 9.9 percent of the rental units in the metro. Among the 50 largest metros, that was the second-lowest rate for that measure. By comparison, rent giveaways are being offered for 35 percent of the stock in both Las Vegas and San Antonio.

Rents, too, have remained solid. At the end of last year, the overall average market rent was $1,155, up 5.4 percent.

Willett, the economist at RealPage, expects rent growth metrowide to slow to about 3 percent and to flatten in downtown Minneapolis and in around the University of Minnesota.

"There aren't any real red flags for the Minneapolis market," Willett said. "But I'd expect little bumps in the market."