Nick Murnane of Opus stood on the balcony at the new Nic on Fifth in downtown Minneapolis. Opus plans to develop two more towers nearby. (The Minnesota Star Tribune)

As the cocktails flowed and a band played poolside at last week's opening of the Nic on Fifth apartments in downtown Minneapolis, the developers who built the 26-story luxury complex looked out on the next place they'd like to do something — one block north.

Opus Development Co. executives said they are now planning two residential towers with 30 floors or more on what's called the Ritz block, which fronts Nicollet Mall between 3rd and 4th Streets.

The plan is a departure from an earlier proposal to build offices and housing on the block, which is currently a surface parking lot. But with Nic on Fifth already 45 percent leased just days after opening, Opus executives are betting that more housing is the way to go.

"Our success at the Nic thus far helped guide this decision," said Nick Murnane, real estate manager for Opus.

At the Ritz block, where a Sheraton-Ritz hotel stood until 1990, Murnane and Dave Menke, president of Opus Development, said they'd like to start with a tower along the Nicollet Mall side, then build another on the Marquette Avenue side when demand warrants.

They are unsure whether the towers will hold condominiums, apartments, or a combination. The company is still working through the design phase and hasn't submitted plans to the city.

They intend for the first tower to have one skyway connection to the Hennepin County Library across Nicollet and one across 4th to the new Xcel Energy headquarters, which is going up between Nic on Fifth and the Ritz block. "Our goal is to transform the north end of Nicollet Mall," Murnane said.

Despite growing concerns about the durability of the rental market downtown, the Twin Cities had the fourth-lowest vacancy rate in the nation, according to a report released last week by Cassidy Turley. At the end of the April-to-June quarter, the average vacancy rate in the seven-county metro area was 2.8 percent, up slightly from the previous quarter.

"Construction hasn't caught up with demand yet, and that speaks to how healthy our market is as a whole," said Julie Lux, at Cassidy Turley. "And lots of people want to get into this market."

Investors are particularly bullish on suburban rental projects where there's been very little new construction. Lux recently listed a 200-unit building in Eagan and already had more than 20 showings. "We have people flying in from all over the country to look at it," she said. "And it's not going to be a bargain."

Even so, there are some weakening signs in the rental market. In areas such as Uptown where several buildings opened within a short time, the market has softened and would-be renters are being offered concessions, including a free month's rent, parking and other perks.

Mary Bujold, president of Maxfield Research, expects vacancy rates to pop up to 7 percent by sometime late next year or in early 2016, though that is still relatively low by industry standards.

Nationwide, demand for multifamily units has exceeded development for the last 3½ years, according to the Cassidy Turley report. So, despite fears of overbuilding, there's plenty of economic and demographic evidence multifamily fundamentals will remain strong.

The Nic on Fifth and several other buildings, including a tower that's being built next door by Mortenson Construction, are remaking an area of downtown called the Gateway District. Within a four-block area, there are now more than 1,000 new apartments, not including the two new proposed towers by Opus.

Also last week. a Chicago-based developer hosted the grand opening at LMP Apartments, a 36-story luxury tower several blocks south along the Nicollet Mall along on the edge of Loring Park.

And on Friday, Minneapolis granted development rights for a parcel to Ryan Cos., which plans to build several hundred apartments atop a parking ramp in the Downtown East development next to the new Vikings stadium.

Jim Buchta • 612-673-7376