If you're amazed by the number of new rentals, wait until next year

Stunned by all the rentals popping up around the Twin Cities? Just wait until next year.

Apartment developers in the Twin Cities are on track to deliver a record 6,000 new units this year and even more hitting the market in the coming year — most of them in the suburbs, according to a third-quarter report from Marquette Advisors.

That shift to the suburbs is being driven by a glut of new units in some parts of downtown Minneapolis and a persistent shortage in many second- and third-tier suburbs.

"I don't know if there's a suburb out there with a vacancy rate of less than 3%," said Brian Roers, co-founder and owner of Roers Cos., a real estate developer. "The suburbs are definitely growth markets."

During the third quarter the average vacancy rate across the metro was 2.5%, but slightly higher when you include all new buildings still being leased-up. The rental market is considered balanced when the vacancy rate is at 5%.

Downtown St. Paul had the highest vacancy rate ­— 5.3% — among the submarkets tracked by Marquette. Downtown Minneapolis, where the average vacancy rate was nearly 5% in existing buildings, but nearly 9% when you include buildings that are still in the lease-up phase, is not far behind.

This year downtown Minneapolis alone is expected to get 1,000 new units, slightly fewer than the year before. But over the next two years the area is expected to get nearly three times as many additional units.

The metro is absorbing new units at the strongest pace since 2010.

In addition to the 6,700-plus units that are expected to be built next year, developers are planning to add more than twice as many in 2021 and 2022. Two-thirds of those new units will be in the suburbs.

That means more options for renters along with relatively modest rent increases in downtown, where annual rent growth during the third quarter already slowed to 1.7%. Across the metro, area average rent was $1,265, a 6.5%-increase year-over-year. Suburban rent growth continues to outpace central cities.

"I think many have been and still do anticipate a slow down, although our market continues to be one of the strongest in the country," said Brent Wittenberg, a Twin Cities-based vice president with Marquette. "We are pretty well positioned as a market heading into any sort of slowdown."

Concessions, including free rent and lease bonuses, are being offered in many submarkets. Wittenberg attributes those mostly to seasonal factors.

Wittenberg says Minneapolis is expected to see a decline in construction as developers fret about a new inclusionary zoning policy and an overabundance of new units. That new policy will require developers to include income-restricted units in larger market-rate buildings.

"Many of our clients are telling us they are moving on from Minneapolis to other submarkets due to IZ," said Wittenberg.

Roers said that rising construction costs, including high land prices as well as the inclusionary zoning policy, are among the many reasons he's taking a break in Minneapolis and is now focused on several new projects in the suburbs.

"Inclusionary zoning makes it challenging on top of other challenges," he said.

Roers has several suburban projects under construction including the Maven, a $23 million project with 137 units that's slated for April in Burnsville. That's a market that hasn't seen a new apartment building in more than a decade, he said.

And at the Venue in Chanhassen, where move-ins started in mid-September, half of the 134 units have already been leased. Roers said that he's trying to appeal to renters who want a less-expensive option than in downtown Minneapolis. One-bedroom units in that building start at $1,100.

"There continues to be strong demand in these markets," he said. "We think there are still opportunities out there."

Jim Buchta • 612-673-7376