Booming market drives up rents and squeezes out renters

The apartment boom underway in the Twin Cities is adding thousands of rentals across the metro area, from lavish lofts to trendy units inspired by feng shui. Only problem is, many people can't afford them.

Rents throughout the state are rising at the fastest clip in 12 years, meaning families of modest means have a tough time finding apartments. A recent report from the Minnesota Housing Partnership found there is a shortage of affordable units in 97 percent of all counties statewide, a problem that is expected to worsen as more luxury units come online.

"It's difficult to build rental housing that's affordable to renters who are most in need," according to Leigh Rosenberg, a housing research and outreach manager at the Minnesota Housing Partnership. "The need is so vast, we don't begin to touch the extent of what we really need."

The study found that the average rent in the Twin Cities stands at $979, nearly a 9 percent increase over the past three years. At the same time, competition for affordable units is rising. The average vacancy rate for the most affordable apartments — those that rent for less than $1,000 — dipped to 2 percent, down from 5 percent just three years ago.

"It's a massive and growing problem," said Alan Arthur, president and CEO of Aeon, a Twin Cities-based nonprofit housing provider.

The rental market has gone through a fundamental shift in the wake of the housing crash, creating more demand than the market can satisfy. With the housing market still in recovery, many people are still wary about buying a house, causing the share of renters to surge. Baby boomers are also putting pressure on supply as they are foregoing big houses in the suburbs for the ease and flexibility that comes with renting.

So far this year, developers have built more than 1,000 luxury rentals, many decked out with the amenities that were once associated only with condominiums. Many of those apartments are in the metro's most popular neighborhoods and are leasing up ahead of schedule.

Affordable housing is in short supply mostly because there's a lack of public and private funding available for income-restricted projects. But rising costs for land and materials also are pushing up prices for apartments. Units in popular locations can rent for $2 or more per square foot.

Hans Early-Nelson and Liz Parent managed to get lucky. The couple recently submitted an application for an apartment at Jackson Flats, a new 35-unit building in northeast Minneapolis that provides live/work space for artists. They've been approved for a two-bedroom apartment that has a separate studio space, and because the rents are below the market rate, it'll be far more affordable than anything else they've seen.

The unit they're interested in will cost about $850, only a bit more than they were paying for their one-bedroom apartment near the Minneapolis Institute of Arts. The new apartment also comes at the right time for the couple. They are expecting a baby, and it provides much-needed space for Parent, a jewelry artist.

"When you start looking at two- and three-bedroom places, the rent can easily ­double," said Early-Nelson.

The average rent for a two-bedroom apartment rose 3 percent in just a year, the biggest gain of any unit type, according to Marquette Advisors. And of the 7,700 new rental units approved by the Minneapolis Planning Commission from 2011 to 2012, only about 900 were considered affordable.

And that portends challenging times ahead for area renters. "We are entering a critical period for housing in Minnesota," said Chip Halbach, executive director of the Minnesota Housing Partnership. "The Twin Cities is a bellwether for the rest of the state, where rental options are already inadequate to meet local needs."

Despite such concerns, rents in the Twin Cities are relatively affordable compared with other comparable markets. Greg Willett, vice president of research at MPF Research in Dallas, said that though Minneapolis is the second-tightest apartment market in the country in terms of occupancy — it's worse only in New York City — rent prices have increased at a surprisingly mild pace.

Over the past year, rents in the Twin Cities rose 2.6 percent, slightly behind a national average of 3.1 percent.

Willett said the situation is far worse in other areas, including the San Francisco Bay Area, Seattle and Denver, where rents are expected to rise 6 to 7 percent annually.

"It might look like pricing is getting aggressive," Willett said. "But compared to the rest of the country, Twin Cities rent gains don't even register on the radar."

Jim Buchta • 612-673-7376