Free rent? Not so much anymore in the Twin Cities

Free rent and other lease sweeteners are becoming increasingly difficult to find as demand for apartments in the Twin Cities begins a return to pre-pandemic levels.

Midway through the year, rents are on the rise in the metro area as the average vacancy rate tightened during the second quarter to 4.1%, according to a recent report from Marquette Advisors.

When factoring in new buildings still in the initial lease-up phase, the vacancy rate was about 5%, but still down slightly from the previous three months.

The report, which tracks mostly market-rate rentals in larger buildings, comes after more than a year of tremendous uncertainty for the rental industry. The coronavirus pandemic upended a robust expansion and touched virtually every aspect of the business — from concerns about whether laid-off tenants would be able to pay their rents to additional cleaning expenses in common spaces such as elevators and hallways.

"Yes, leasing velocity has returned to the market," said Brent Wittenberg, vice president of Marquette Advisors.

At the end of June, the vacancy rate had declined in 49 of 54 submarkets tracked by Marquette. The average rent in the metro was $1,320, a $9 increase over the same time last year.

Urban areas, where thousands of new rentals had already made it a renter's market, were particularly hard-hit by both the pandemic and social unrest in the wake of the George Floyd murder in Minneapolis.

Vacancy rates in both downtowns were still higher than the metro as a whole.

In downtown Minneapolis the average vacancy rate during the second quarter was 7.2%, up about a percentage point from last year at the same time. That represents a significant improvement from the first quarter, when vacancies were at 10.4%. Including rentals that were newly completed and just coming online, the average vacancy rate last quarter was slightly higher.

In downtown St. Paul, the average vacancy remained at 9.6%, a more than two percentage point increase from this time last year and a slight decline from the previous quarter.

"Despite all of the challenges in downtown Minneapolis, we are encouraged by the leasing activity here," Wittenberg said.

He noted that more than 1,700 new apartment units in Minneapolis have been leased in the past 18 months, which accounts for more than a quarter of all the apartments in the Twin Cities metro area.

What's happening in the Twin Cities mirrors national trends, with rents inching upward as the number of vacancies decreases.

Yardi, a national rental research company, reports an increase in August rents among the top 30 metros nationwide, which includes the Twin Cities. The average hike nationally was 10.3% on a year-over-year basis. Twin Cities rents were up more than 5%, slightly more than New York and San Francisco.

With rents on the rise again, bargain hunters likely will find the best deal if they're willing to squeeze into a studio apartment. Vacancy rates for those smaller units in the central cities were much higher and more widespread than in the suburbs. Across the metro, the vacancy rate was lowest for one-bedroom-plus-den apartments followed by three-bedroom units.

Notably, the vacancy rate for studio apartments has declined during the course of the year, as younger and more cost-conscious renters have sought out more affordable options.

The bulk of those smaller units have been built in the central cities where construction has been most robust over the past decade. Development, however, has been shifting to the suburbs over the past couple years and that trend has continued.

During the first half of the year, developers have completed more than 3,000 units across the metro. About a quarter of them are in downtown Minneapolis, where more than 2,500 units opened during the past 18 months. Total production in the metro, however, is far less than half of what it was for all of 2020.

One of the best indicators of the strength — or weakness — for rental owners is the prevalence of concessions, which were more common during the early months of the pandemic and in the wake of the social unrest last summer.

Discounts and offers of one or two months' of free rent have moderated across much of the metro area in recent months, although they remain in use in some parts of downtown Minneapolis and St. Paul, as well as inner-ring suburbs where several large apartment buildings are competing for the same renters.

Stefanie Sokup, vice president of marketing for St. Paul-based Real Estate Equities, which owns and manages thousands of income-restricted rentals and handful of market-rate buildings, said the turnaround has been pronounced.

"I'd say we're back to pre-pandemic [vacancy] levels if not higher," she said.

Significant dips last year forced the company to offer two months of free rent and other enticements, Sokup said, but that's no longer the case as leasing levels have rebounded.

"People were fleeing that area like crazy; everything they moved there for was gone," she said, referring the pandemic's forced closure of restaurants and entertainment venues combined with periods of civil unrest. "People freaked out at first and are now over it, so we're operating back to normal."

Sokup said that because Real Estate Equities didn't raise rents last year in the face of rising expenses, it likely will implement higher-than-average rent increases next year.

More uncertainty remains, Sokup and other property managers said. Rental delinquency rates remain high and collections are still an issue given that a federal rental program administered by the states still hasn't provided missed rent payments for those who qualify.

"The checks have yet to start rolling in," Sokup said.

With market conditions improving, Real Estate Equities plans to develop an additional 2,500 income-restricted units in Minnesota and Arizona, along with a handful of projects it expect will open this year.

That includes the Aster House apartments in Eagan, which began construction earlier this year and is expected to be completed in 2022. Already, the company has opened Sonder House in Brooklyn Center, which is aimed at lower-income families. Two months after leasing began on that project, the buildings were full.

"The need for affordable housing is still crazy," Sokup said. "I blinked and they were fully leased. It was unbelievable."