Apartment demand remains high in the Twin Cities, as new construction shifts to suburbs

Even after almost four years of booming apartment construction, the Minneapolis-St. Paul metro still has the tightest vacancy rate of any major U.S. city, according to Witten Advisors, a national multifamily housing consulting firm.

Strong renter demand and steady rent growth are likely to continue in the Twin Cities rental market.

But some counterforces are emerging. Financial backers, who are seeing longer lease-up times for new luxury urban projects, are becoming more cautious. In turn, developers are focusing more sharply on underserved suburban locations and more diverse housing types.

Those were some of the insights voiced by a panel of experts this week at a Minnesota Multi Housing Association seminar in downtown Minneapolis. The event focused on the state of the local industry as 2017 rolls into summer, when the construction season reaches its peak.

There's little doubt that the apartment-building boom is continuing. According to Minneapolis-based multifamily property brokers NAI Everest, some 8,440 units were under construction at the start of the year, expected to deliver in the coming months, while a whopping 31,752 additional proposed units were in the development pipeline.

Even though that adds up to a lot of new product, so far it's all been snapped up by seemingly insatiable demand driven by a still-growing cohort of young renters, changing lifestyle preferences among older renters and growing ethnic diversity, according to Ryan Davis, senior economist for Dallas-based Witten Advisors.

That's especially true in the Twin Cities, which has emerged as the national leader when it comes to "renter enthusiasm," especially among well-off baby boomers.

"In Minneapolis, demand is more than keeping up with the supply. It's going counter to the national trends that way," Davis said. "In fact, it remains the tightest rental market of all the major U.S. cities we look at."

Davis added that renters here are getting older and wealthier. "Half of the growth in Minneapolis since 2010 has been among renters 55 and older, and 40 percent of the growth has been among renters making at least $75,000 annually," he said. "That's how the Twin Cities market has been able to maintain its healthy rent growth."

Others on the panel, meanwhile, said they are seeing few signs that the apartment boom is in the "ninth inning," despite a bit of sluggish start to 2017.

"General occupancy apartments, senior housing, condominiums … All of those sectors have been very strong since we've come out of the recession," said Rick Fenske of Weis Builders. "We had more apartments delivered in 2016 than in any year since the late 1980s, and the pipeline looks strong as well. We had a slow start this year, but several significant projects will be breaking ground in the third and fourth quarters."

One of the most active multifamily builders in the Twin Cities has been Opus Development Co., which is currently working on an urban project — its 365 Nicollet high-rise building in downtown Minneapolis — as well as a suburban effort in Edina, where it is constructing a new complex near the headquarters of UnitedHealth Group.

Opus Vice President Matt Rauenhorst said what's most important in a new development now is that there be a compelling "story" and location differentiating it in an increasingly crowded multifamily market. For instance, the narrative for the 370-unit Nicollet Mall building, to be completed in November 2018, will be one of stretching the boundaries of rental luxury.

"We modeled it on what we did at Nic on Fifth and just took it further from a luxury perspective," he said. "There's higher-end finishes, more penthouses as a percentage of the overall unit mix, bigger balconies … it's just more of everything."

Rauenhorst said he's aware of concerns about hitting the top of the market for rents. "But in talking to our residents, this is what they want," he said. "They're saying, 'We'll pay more if you can give us condo-like finishes.' "

Don Jacobson is a freelance writer based in St. Paul. He is the former editor of the Minneapolis-St. Paul Real Estate Journal.