Average monthly rent in the Twin Cities went up 6% last year

The average monthly rent in the Twin Cities hit $1,290 last year, nearly 6% higher than the year before and the biggest annual gain in at least a decade, according to an annual report from Marquette Advisors, a real estate research firm.

The biggest increases came in the suburbs, which have seen scant construction compared with downtown Minneapolis, where rents have been increasing at only half the pace as building managers offer rental incentives and construction continues unabated.

"Developers are full steam ahead," said Brent Wittenberg, vice president of Marquette's Twin Cities office.

For renters, relief could be on the way. Over the next three years developers are expected to add another 30,000 units in the Twin Cities, exceeding the 27,000 total added in the market in the past seven years. The majority of the new building will be in the suburbs.

Though renters in the Twin Cities don't pay as much as they do in several larger metro areas and many coastal markets, the competition for apartments in some parts of the Twin Cities is fierce. As of November, Twin Cities had the 11th highest rent increases in the nation, according to Yardi Systems, which tracks the rental market across the country, outpacing many more expensive coastal markets including San Francisco, Seattle and Miami.

Despite a decade of increased apartment construction, the 3.1% vacancy rate in the Twin Cities is among the lowest in the nation, and that means significantly higher rent gains, especially in the suburbs that have seen little new construction. In several suburbs, rents have increased at more than twice the rate of some urban areas. In downtown Minneapolis, for example, rents increased 3.9% compared with 8.3% in Bloomington.

Apartment openings across the metro area have varied dramatically, and that doesn't take into account income-restricted buildings, which often have waiting lists that are years long. In downtown Minneapolis, for example, the vacancy rate was twice the metro average, at 6.8%, while many suburbs had vacancy rates below 2%.

Wittenberg said that given the number of units in the pipeline over the next couple of years, rent gains are likely to soften in various submarkets.

"This will happen from the inside out, central cities first then suburbs," he said.

In inner-ring suburbs such as Richfield and Bloomington, apartments are being rented as fast as they're being built.

"First-tier suburbs are very attractive to people working and living in the area," said Bob Cunningham, partner at Twin Cities-based Inland Development Partners (IDP). "The school systems are great, and so is the access to outdoor trails and recreation."

The company recently opened the Chamberlain Apartments in Richfield, the first new apartment building on the east side of the city since 1971. It includes a mix of income-restricted and market-rate rentals.

IDP partnered with Urbanworks Architecture and Kraus-Anderson Construction to build three new apartment buildings with 283 units and renovated three vintage 1960s apartment buildings with 33 units. About 20% of the units are income-restricted.

Cunningham said the project, which opened in stages within the last few months, is 45% leased — ahead of expectations.

"The metro area has created wonderful job opportunities, but we can't keep up with housing to support those jobs," he said. "We can't build enough single-family homes to accommodate growth."

The company is also working on a project in Robbinsdale called Parker Station Flats, a 198-unit building that's within walking distance to restaurants and retail in the first-ring suburb.

"Both Richfield and Robbinsdale are looking to create housing opportunities and are struggling to meet current demand," Cunningham said. "A lot of people only have multifamily as an option and we're still catching up, but we haven't run out of runway. It's not going to be the market that slows down, it will be construction costs."

Wittenberg said that in the next year the biggest rent increases will happen on older, more affordable buildings that can't be replicated today because of higher construction costs.

A forecast this week from Marcus & Millichap says that a surge in construction at a time when job growth is expected to slow should ease rent increases in the Twin Cities. It says that during 2020 rent gains should decline to 4.9% as new units hit the market.

Jon Ruzicka, regional manager for Marcus & Millichap's Twin Cities office, said the local apartment market has maintained its resiliency for developers and building owners because household growth has outpaced housing creation, wages have increased and the rising cost of homeownership has enabled many apartment operators to increase rents even though new development has increased dramatically.

"With all of that being said there are a few submarkets we will closely watch in 2020 and beyond to gauge the absorption with a number of new projects being added to the existing inventory," he said.

The most vulnerable areas include the downtown and Uptown areas of Minneapolis as well as St. Louis Park.

"These areas have historically been the highest rental rate markets," he said. "Which is what has drawn developers to them."

Jim Buchta • 612-673-7376