Strong apartment market continues to push up rents in Twin Cities

Apartment construction in the Twin Cities was off the charts last year, but the vacancy rate across the metro remains the lowest in the nation. And that means rents continue to rise.

Though more than 4,800 new apartments — the most in at least a decade — hit the market during 2018, the average vacancy rate increased only slightly to just 3.5 percent, according to a year-end report from Marquette Advisors, which tracks new and existing market-rate apartment buildings across the metro. That figure includes new builds still in the lease-up phase, but not senior and subsidized rentals.

"Demand remains robust, even more so than many had anticipated," said Marquette Vice President Brent Wittenberg. A vibrant local economy is drawing employees from other areas, and many of those young workers who are new to the Twin Cities are choosing the flexibility of a rental apartment over homeownership. Marquette says that last year there were seven jobs added for every new apartment.

Rental owners are also benefiting from a lack of for-sale houses that are affordable to "aging" millennials. "Many are simply continuing to rent rather than buy," said Wittenberg. "This relates in part to a market deficiency, a lacking of attractive home purchase options in the places where they want to be."

Across the metro, the average rent at the end of the year was $1,219, a nearly 6 percent year-over-year gain. Much of that increase comes from an influx of upscale, more expensive apartments that are skewing the average.

Yet the biggest rent increases are being felt by people renting older, less expensive apartments in the suburbs where there's a shortage of apartments that are affordable to working-class renters.

By just about every measure, the rental market in the Twin Cities has consistently outperformed the nation, making it the darling of national investors who see potential for rent growth beyond what's already happened.

Across the metro, leasing activity last year was the strongest since 2015; 3,922 units were absorbed, the most since 2015.

And though rent increases weren't the highest in the nation — property owners in Las Vegas saw the biggest gains — the occupancy rate in the Twin Cities at the end of last year was the highest of all the major metro areas tracked by Yardi Matrix's Multifamily National Report.

Still, a handful of submarkets in the Twin Cities are flush with new units, giving renters plenty of options including landlord concessions aimed at enticing new renters. The vacancy rate was highest in Hennepin County (3.4 percent), lowest in Scott County (1.4 percent).

All eyes have been on downtown Minneapolis, the epicenter of the apartment construction boom over the past several years and one of the most expensive markets in the metro.

Developers added 1,286 downtown apartments last year, pushing the vacancy rate to 7.6 percent (including all new units), the highest in the metro but down slightly from the previous quarter. That's compared with 4.6 percent across the city and 2.7 percent in St. Paul.

Renters absorbed 906 units downtown during the year, nearly double the previous year. Downtown Minneapolis accounted for a quarter of all new units in the metro last year. As a result, rent increases slowed and concessions such as free and reduced rent have become more commonplace.

The downtown building boom is far from over. Marquette expects an estimated 1,100 units will hit the market this year and another 2,000 to 2,500 in 2020.

Brenda Hvambsal, a vice president at Steven Scott Management in Minneapolis, said the Marquette report squares with what she's seeing. The higher the rent, the higher the vacancy rate, she said. Conversely, buildings with the lowest rents have the lowest vacancy rates. "Overall we continue to be very well occupied with just a few pockets of vacancy," she said.

Jim Buchta • 612-673-7376