New Twin Cities construction means that fall will be a good time to rent an apartment

The rental market across the metro area has already tightened a bit this summer, but with a record number of new apartments going up this year, tenants in some areas might find more options — and maybe some free rent — in the coming months.

By the end of June, the average vacancy rate in the metro had declined to 4.1%, causing an average 4.4% increase in rents, according to a report from Marquette Advisors.

Though apartment openings and rents varied dramatically, some parts of the metro are likely to notice more "for rent" signs. By the end of the year, an additional 5,500 market-rate rentals should reach completion, flooding the market with new options. That's expected to cause the average vacancy rate to top 6%, increasing the number of rent concessions in some areas.

"Supply is catching up to demand," said Brenda Hvambsal, vice president of marketing for Steven Scott Management. "But I am more tentative about what the third and fourth quarter will look like because we've had a lot of product opening. It's always a little tougher when buildings open at the same time."

Hvambsal and others said demand for rentals always increases during the summer, but more definitive return-to-work policies this year combined with the lifting of the eviction moratorium late last year have upended normal patterns.

"The housing market is still reacting to COVID-related policies and living habits," said Stefanie Sokup, director of marketing for Minneapolis-based Schafer Richardson.

She said many people are moving farther from the cities to outer-ring suburbs, where they can find more for their money.

"I think those that know their work-from-home schedule is permanent are more willing to move farther from their office. There is also a lot of development going on in the southwest suburbs, and they will be delivering last this year and early next. So that will pull people out of the city as well."

The report — and the promise of more options for renters — doesn't include income-restricted units that are more affordable to many working-class renters. Those options are still in short supply, and many have long waitlists.

At the Peregrine, a new apartment building in Minneapolis along the Mississippi River that Schafer Richardson is developing for people who earn 30% to 80% of the area median income, demand has been strong.

Though that building doesn't open until late August, Sokup said, the company is receiving more than 20 new applications per week.

"We are seeing great demand," she said.

The Marquette study said a total of 10,033 new market-rate rentals are expected to be available by the end of the year.

Just as renting trends are shifting, so, too, are development patterns. During the past few years, apartment construction has shifted from the center cities to the suburbs. Less than a third of all new units this year will be in Minneapolis and St. Paul, where construction has been most robust recently.

More than a quarter of the units will be in the southwest suburbs, including Minnetonka, Eden Prairie and Shakopee. That region will produce even more apartments next year, when its share of new apartment construction is forecast to top 40%.

The Marquette report and interviews with local property management companies suggested leasing activity still exceeds pre-pandemic levels but has slowed slightly.

Compared with the first quarter, renters signed nearly twice as many new leases during the second quarter, but the combined period was down slightly compared with the same time last year. Still, leasing during the first half of the year was more than 70% higher than the pre-COVID five-year average.

The increase in supply compared with the slight decline in demand is expected to cause the vacancy rate across the metro to exceed 6% for the first time in several years.

The market is considered balanced when the vacancy rate is 5%.

In many parts of the metro area, the vacancy rate already far exceeds 5%, including Minneapolis, St. Paul and Coon Rapids. At 12.9%, Robbinsdale had the highest vacancy rate in the metro, but a submarket that includes Savage, Prior Lake and Shakopee was not far behind. Nor was Cottage Grove, Newport and St. Paul Park, with a vacancy rate of 9%.

In those cities, where several new buildings have opened, concessions are most prevalent. At the Lake Ridge Apartments in Prior Lake, for example, internet is free with a 12-month lease, a $62 per month savings. The Avana Addison apartments in Shakopee are offering a month free rent for some units. And at the Duffey in Minneapolis' North Loop, the deals are even better: two months free rent with a long-term lease, plus a waived pet fee and application fee for those who lease within 48 hours of a tour.

Those deals are much less likely in submarkets with low vacancy rates, including Eden Prairie, Hopkins and Edina, where the vacancy rate was less than 2%.

Multifamily construction permits have been declining all year, and the number of new units should be significantly lower next year.

Mary Bujold, president of Twin Cities-based Maxfield Research, said a fundamental weakness in the market hasn't driven those declines, rather uncertainty in the financial markets and uneasiness among lenders.

"A lot of groups are struggling to pencil out developments, to make them work at current interest rates," she said. "It's getting real tough."

She said that while vacancy rates are expected to increase in the short term, there could be additional demand for rentals later this year and next from would-be home buyers currently priced out by the increase in mortgage rates.

The prospect of additional demand bodes well for companies that are now offering a month or two of free rent for those willing to sign a long-term lease. That's already prevalent in downtown Minneapolis, the North Loop and a handful of inner-ring suburbs.

But, Bujold said, don't expect landlords to start lowering rents.

"It has to get pretty bad for them to do that," she said. "Our multifamily market is good. ... We didn't have enough for-sale housing to begin with, and when interest rates went up, that only made it worse."