Twin Cities apartment market stays hot, driving up rents

Apartment rents keep ­rising, but vacancy rates keep falling.

A midyear report says the average vacancy rate across the Twin Cities metro during the second quarter was just 2.4 percent, down slightly from last year and the previous quarter, according to Marquette ­Advisors. The market is considered balanced when there's a 5 percent vacancy rate.

Even when you factor in new buildings that are still filling empty apartments, the vacancy rate during the quarter was only 2.7 percent compared with 3.2 percent during the previous quarter. Persistent demand and an increase in new upscale apartments mean average rents are on the rise. The average rent across the 13-county metro at the end of July was $1,111, a 3.1-percent annual increase.

"We've been pleasantly surprised this year," said Matt Fransen, vice president of real estate investments for Timberland Partners, a Twin Cities-based company that manages about 12,000 apartments in a dozen states. "The Twin Cities is one of the best performers without a doubt."

Fransen said demand is being fueled by a variety of demographic changes. Millennials and baby boomers are still fond of renting because of the amenities and convenience that apartment living offers. But there's a more powerful force that's driving demand for rentals: Job growth via business expansion and hiring for new companies.

Through the first half of the year, the metro added an estimated 34,900 new workers, according to the Minnesota Department of Employment and Economic Development, far surpassing full-year job growth during each of the past two years.

In contrast, the rental market in Tulsa, Okla., is extremely soft because so many jobs have been lost in the energy sector downturn, Fransen said.

By every measure, demand for workforce rentals is off the charts. That's why, Fransen said, Timberland is in the process of developing two Twin Cities projects that include some income-restricted rentals. In Eden Prairie, Elevate is a 222-unit complex that will be situated at the end of the proposed Green Line addition to the Southwest light rail. The company is also partnering with Jeff Barnhart on the 242-unit Green on 4th project in the Prospect Park neighborhood in ­Minneapolis.

For market-rate buildings, vacancy rates across the metro vary dramatically from 0.9 percent in Stillwater to 5 percent in Brooklyn Park, with the vacancy rate in most metro markets hovering at less than 2 percent. Annual rent gains also vary wildly, from 1 percent in ­Roseville to 17.8 percent in Shakopee largely depending on how many buildings have been built.

While apartments are being rented as fast as they are being built in some parts of the metro, that's likely to change next year when a wave of new development hits.

During the first half of the year, the absorption rate — the number of units that were rented — exceeded the number of new units that hit the market. From January through July, renters occupied 2,061 empty apartments; during the same period only 1,180 new units were built. By the end of the year, developers are expected to complete 3,800 rental units and an additional 6,000 units in 2018.

Even in downtown Minneapolis, which has been the epicenter of the apartment building boom, the average vacancy rate remains relatively low at 2.7 percent. The average rents increased 3.6 percent to $1,602, and downtown Minneapolis added 1,500 units — twice as many as the previous year.

Downtown St. Paul is also on a roll, with the absorption of an estimated 245 units. Including stabilized properties, the vacancy rate in downtown St. Paul fell to 3.6 percent with the average market-rate rent increasing 5.2 percent over last year to $1,512.

As prime sites dwindle and concerns about demand rise in the downtowns, development is shifting to suburbs where there has been virtually no apartment construction over the past two decades. In the southwest metro, for example, more than 2,200 new units are expected to come online this year and next, accounting for nearly a quarter of all construction in the metro.

"I would say that in most of the submarkets, we are seeing little if any weakness," said Mary Bujold, president of Maxfield Research and Consulting.

Bujold said that in some locations where there has been a significant number of new units that have come online, at the same time the market is likely to show some weakness during lease-up and for several months after.

"I had been a little concerned about St. Paul on the west side, but a recent increase in absorption seems to have cleared that up," she said. "Most other locations now seem to be doing quite well."