Good news for renters? Twin Cities apartment vacancies are rising

Urban apartment owners bore the brunt of the global pandemic and urban unrest in the Twin Cities last year, providing relief for some renters.

At the end of 2020 the average vacancy rate for market-rate apartments across the metro rose more than a percentage point to 4.4%, according to a year-end report from Marquette Advisors. When including newer buildings still being leased, the figure was 5.4%.

At those rates the rental market — for the first time in several years — is now closer to what's considered a balance between supply and demand, except in a handful of suburban submarkets and downtown Minneapolis and St. Paul where it's now a renter's market and likely to become more so in the coming year.

"History tells us that people have a short memory, and many will again seek the lifestyle afforded to them through downtown living," said Brent Wittenberg, Marquette vice president. "Our concern, though, is that lifestyle proposition has certainly changed, with

fewer restaurants, bars, etc. and continued concerns about safety and social unrest."

He said the vacancy rate last year was lower than anticipated because of the eviction moratorium. A shortage of for-sale housing, especially those that are affordable to first-time buyers, also helped drive some demand for rentals.

Still, the market suffered a noticeable shift last year with rental absorption (the number of new leases) in the metro falling 53% from the previous year to the lowest total since 2012. Nearly half of that absorption was in downtown Minneapolis despite the unexpected challenges of 2020.

The overall average vacancy rate for all suburban submarkets was 3.8%, compared with 6.2% in Minneapolis and 5.5% in St. Paul, not including those newer buildings still in their initial lease-up phase.

At Twin Cities-based Steven Scott Management, which manages nearly 10,000 units across the metro, the company's overall vacancy rate declined slightly, according to Brenda Hvambsal, the company's vice president of marketing.

But there were distinct variations in demand depending on the location, price and age of the buildings, she said. Urban buildings saw higher vacancy rates, she said.

Despite recent shifts in the market the company is still planning to open several new projects this year, Hvambsal said. They include a mix of market-rate and income-restricted buildings in both the suburbs and city.

"I expect the urban/class A [buildings] will be slower," she said.

The Marquette report said empty apartments were most prevalent in downtown Minneapolis, where the vacancy rate was 8.4%, and 11.2% in downtown St. Paul. When adjusted for new supply still in the lease-up phase, the vacancy rate in both areas was more than a percentage point higher.

It has long been expected that the urban markets would soften. Residential rentals led the construction industry out of the Great Recession with thousands of apartments being built every year, mostly in downtown Minneapolis which accounted for about a quarter of all new units built in the metro since 2013.

At the beginning of last year downtown Minneapolis was still a hotbed for new development though there were already signs of weakness. The pandemic and a summer of social distancing only added to the uncertainty.

Wittenberg expects the downtown Minneapolis vacancy rate to remain elevated, likely in the 10 to 11% range this year, including all new inventory still in initial leasing.

Despite anxieties about the current vacancy situation in downtown Minneapolis, he's impressed with last year's absorption rate. "There are nearly 1,200 more renters in downtown Minneapolis than a year ago," he said.

Developers are far from idle. About 8,500 units are expected to be completed this year, and even with leasing activity expected to strengthen later in the year Wittenberg predicts the average vacancy rate to hit 6.5 to 7.0% this year.

Those increases stand to benefit renters via concessions aimed at attracting new renters rather than rent discounts. At the end of the year average rent across the metro was $1,321, a 2.7% annual increase. Some of that increase, though, can be attributed to new, more expensive rentals opening.

Wittenberg estimates that about a third of all Twin Cities apartment communities offered concessions of at least one month of free rent during 2020. Certain submarkets including downtown Minneapolis and St. Paul are seeing concessions of two months or more free rent, most often in newer buildings that are still in the lease-up phase.

"People are certainly anxious to see whether we experience an uptick in leasing velocity as we move into spring, as we normally do," said Wittenberg. "Job growth and in-migration are key to that, obviously, and those indicators continue to improve."

Jim Buchta • 612-673-7376