Will 2018 be the peak of the apartment construction boom in the Twin Cities area?
An estimated 6,000 apartment units are expected to enter the market this year, an all-time production record for the seven-county metro, according to Marquette Advisors’ fourth-quarter Apartment Trends report.
But the avalanche of new apartments has market experts split on whether the sector may sputter.
By the end of 2017, renters continued to fill more apartments than new units coming into the marketplace. The market continued to favor landlords between rising rents and lower vacancy rates.
The report shows the area’s overall vacancy rate fell from 2.5 percent in the third quarter to 2.4 percent at the end of last year. That rate is also down from 2.7 percent in 2016. Apartment leasing outpaced construction, with the market absorbing 3,465 apartments during a year in which 3,382 were completed. The number of new units also was the highest in eight years.
Newcomers moving to Minnesota and the formation of new households should create plenty of demand for the new apartments, said Brent Wittenberg, a vice president with Minneapolis-based Marquette Advisors.
Apartment developers are also planning projects that appeal specifically to retirees, and to “aging millennials” seeking smaller, more affordable units to remain in urban areas. This diversification in product types is a change from recent years when the market has been “oriented toward more expensive units,” Wittenberg said.
“I would have greater concern if we were building 6,000 units and it was more of the same,” he said in an interview Monday.
But even if demand remains high, the upcoming apartment production numbers are daunting, said Abe Appert, a senior vice president with the Minneapolis office of CBRE. The last time the Twin Cities saw so many apartments absorbed was in 2010, when 6,433 were leased, according to the Apartment Trends report. By 2013, developers started delivering apartments at a pace of about 3,000 per year.
If all the proposed units are built this year, the vacancy rate could approach 4 percent, said Appert, who specializes in the apartment market.
“We’re not going to absorb 6,000 units,” he said in an interview. A 5 percent vacancy rate is considered a balanced market for landlords and tenants.
Still, Appert couldn’t argue with the solid performance the market turned in last year. Vacancy rates tightened throughout the metro area.
Only three metro area cities ended the year with a vacancy rate higher than 4 percent, according to the report. Brooklyn Park had the highest vacancy rate — 4.5 percent. Edina, which has its own apartment construction boom, was at 4.4 percent.
Downtown St. Paul’s vacancy rate was 4.2 percent, down from 5.9 percent at the end of 2016.
The vacancy rate in downtown Minneapolis – where thousands of units have been built — was 2.9 percent, down from 4.6 percent.
The lowest vacancy rate – 0.3 percent — was in northeast Minneapolis.
Area rents continued a steady, eight-year rise. The average Twin Cities rent rose 5.4 percent from $1,095 to $1,155 between the end of 2016 and the end of 2017.
Some of the highest rents were in the downtowns of Minneapolis and St. Paul. Minneapolis rents increased 4.1 percent from a year before to $1,644, while downtown St. Paul rents averaged $1,535, up 5.2 percent. Downtown Minneapolis has the highest average rent among the submarkets tracked by Marquette Advisors.
Outside the urban cores, the Cottage Grove area saw the highest average rent growth, with a 14 percent jump from $883 to $1,006. Rents rose 7 to 8 percent in a number of other Twin Cities suburbs, including Fridley, Edina, Minnetonka, Shakopee and Bloomington.
That rent growth is giving developers more reason to look outside the downtown cores of the Twin Cities for their projects, Wittenberg said.
“I think they’re starting to look at the suburbs,” he said. “New development requires more rent growth.”
But in 2018, the urban core will still get a big dose of new apartments. Some of the largest projects on track to open this year are Lennar Multifamily’s 280-unit Nordhaus Apartments at 315 First Ave. NE in Minneapolis, the 336-unit Rise at Prospect Park at 2929 University Ave. SE in Minneapolis, and a 369-unit apartment tower Minnetonka-based Opus Group is building at 365 Nicollet Mall.
Finance & Commerce’s online Twin Cities Apartment Development Tracker shows that since 2011, at least 34,517 units have been proposed, completed, scrapped or are under construction.
The amount of Twin Cities apartment construction is unusual in the national apartment market, Appert said. Developers are cutting back on delivering new apartments in comparable markets including Denver, Austin, Texas, and Boston, he said. Investment in apartments in the Twin Cities also hit an all-time high of $1.9 billion in 2017, he said.
The average purchase price per unit is $123,395 in the Twin Cities, according to Finance & Commerce’s Apartment Sales Tracker, which has recorded the sales of 41,896 units since August 2011.