A rental reckoning is coming to Twin Cities housing

For renters in the Twin Cities looking for the most options and cheapest prices, now is the time to act.

The demand for new apartments hit a slight lull in the past few months, slowing from the rapid clip of leasing earlier this year. Developers are scrambling to finish thousands of new rentals, but construction essentially plummets after that, meaning stiff competition and higher rents are incoming.

“We expect more tightening in the months ahead, setting the stage for owners to be more aggressive with rent increases during the next two years,” said Brent Wittenberg, senior vice president for Marquette Advisors.

Despite a cooler fall for rentals, the average apartment vacancy rate during the third quarter eked out only a slight gain, rising to 4.4% across the metro, according to a new report from Marquette Advisors, which tracks rentals in larger, market-rate apartment buildings. Vacancies during the quarter increased only slightly from the previous one and are on now on par with a year ago.

A 5% vacancy rate indicates the rental market is evenly balanced between supply and demand, but that hasn’t been the case in the Twin Cities for several years, despite a record a surge in newly built apartments in the past few years.

Because there are more would-be renters than available apartments in some parts of the metro, rents posted another year-over-year gain, on par with the previous quarter. The average asking rent across the metro was $1,514, a 3.7% increase from last year. Rents increased at a higher rate in the suburbs, including St. Anthony and Mounds View, which posted double-digit gains as new buildings brought more rentals into the rental pool.

Even the metro’s urban areas, which have been hot spots for developers through the past several years, are seeing higher rents. In St. Paul, which is still absorbing the impact of the city’s still new rent control ordinance, rents increased 2.7% year-over-year, outpacing Minneapolis by nearly a full percentage point.

The Marquette report doesn’t track income- and age-restricted rentals, which are often government-subsidized and nonprofit-operated. Many of those buildings are consistently full and have yearslong waiting lists.

Nationwide, the Twin Cities is considered one of the most competitive places for renters. In many parts of the country, including the Sun Belt states, apartment construction has outpaced demand. That’s not the case in the Twin Cities, which has been posting some of the biggest rent gains in the nation. According to Redfin, the average cost per square foot rose more than 8% during October — one of the biggest gains in the nation.

And in August, Minneapolis was named the most coveted rental hot spot in America based on online apartment searches. RentCafe’s monthly rental activity report showed after taking the top spot in August, the city dipped to No. 3 in September, but listings for available rentals decreased 14%.

The report said the ranking suggests the city continues to draw interest, primarily from local renters but also from outstate apartment hunters, especially those currently based in Chicago or Dallas.

The decline in construction comes at a time of robust demand, especially during the first half of the year when new units were filling at an exceptionally strong pace. During the second quarter alone, renters snatched up a record 2,700-plus new units. So far this year, apartment demand is tracking about 10% higher than the five-year average across the Twin Cities market.

Demand for new units dipped a bit during the third quarter, when only 767 empty units filled. Wittenberg attributed that decline to a slowdown in the jobs market and election uncertainty at a time when the “last wave” of new units was hitting the market.

“Limited for-sale listings and [higher borrowing] costs are certainly factors which are keeping more folks in rentals,” Wittenberg said. “And those issues both tie out to the higher mortgage rates we are still seeing.”

Rising demand for rentals is happening even in downtown Minneapolis, where demand slowed considerably during the pandemic. So far this year, 920 units have been rented out, and with 1,642 new units opening in 2024 (mostly during the second half of the year), the vacancy rate increased to 8.7%, including those new buildings still in the initial lease-up phase. Not counting those new buildings, the vacancy rate was only 5.5% during the third quarter after peaking at 7.7% in 2020.

“The demand is encouraging,” Wittenberg said. “We could very well see record absorption in downtown Minneapolis for the full year in 2024.”

In contrast to communities with lower construction costs and more lax zoning rules, the Twin Cities metro has higher borrowing costs and near-record construction costs that have forced many developers to sideline their plans for new buildings. After building a record 9,995 units in 2022, apartment construction across the metro has plummeted. This year, the Marquette reported expected 7,200 market-rate units to come online compared to only 2,800 in 2025.

So far this year, a little more than 1,800 new units have opened in Minneapolis, with only 221 in St. Paul.

The latest report from Housing First Minnesota, a trade group that represents homebuilders, multifamily construction during October posted its first year-over-year increase since February. Last month, builders pulled enough permits to build only 354 multifamily units.

So far this year, cities issued developers only enough permits to build 1,644 rentals. That’s only about a quarter of all planned housing units across the metro. Typically, multifamily units represent half of new housing units.

Developers have put the finishing touches on a handful of new towers in downtown Minneapolis. After those are completed, there’s nearly nothing in the pipeline.

At a luxury high-rise tower called O2, 72 of the building’s 240 units have filled since leasing began in September, according to Chris Sherman, president of Sherman Associates.

“Typically, September and October tend to be slower, but we have had a lot of good traffic,” Sherman said.

Even at O2 — where the average rent is about $2,700 per month and the average apartment has about 930 square feet, making it much larger and more expensive than many downtown buildings — Sherman said the building caters to higher-income renters who either work downtown or are seeking a new lifestyle.

“We have been seeing a population of renters coming to downtown who are empty nesters or looking to downsize from larger homes around the Twin Cities,” he said. “A good chunk are downsizing to come downtown.”

Sherman said demand for rentals is especially strong in the Mill District neighborhood, where several new restaurants have opened, and the company has three buildings that are now 97% occupied.

In those buildings and others that now have higher occupancy, renters are less likely to see offers of a month or two of free rent or other discounts common during the pandemic.

“Everything is trending in a positive way,” Sherman said. “We’re seeing improved year-over-year reductions in concessions, increases in occupancy and greater retention of our tenants.”