APARTMENT VACANCY STEADY AMID BOOM

By: KARLEE WEINMANN, FINANCE-COMMERCE.COM 

Twin Cities apartment vacancy rates remained steady through the second quarter of 2015 amid sustained strength in development hotspots in downtown Minneapolis and increasingly popular suburban markets.

The vacancy rate in the Minneapolis-St. Paul metro area, adjusted to account for new units still signing tenants, hovered around 3 percent during that span, according to a new report from Minneapolis-based Marquette Advisors. Rates above 5 percent generally favor tenants.

On an unadjusted basis, the vacancy rate ticked up slightly to 2.9 percent from 2.7 percent in the first quarter.

But in downtown Minneapolis, ground zero for the apartment construction boom, the vacancy rate at the end of the second quarter was higher and growing. By June 2015 it hit 7 percent, compared with 5.7 percent a year earlier.

Still, the downtown Minneapolis submarket continues to drive absorption, though the measure slowed across the metro area during the first six months of 2015. Throughout the Twin Cities, absorption totaled roughly 1,200 units – down from 1,754 units a year earlier – but 40 percent of them were in downtown Minneapolis.

Marquette reports 1,441 new units were built in downtown Minneapolis in 2014 and 957 will have been completed by the end of this year.Across the Twin Cities, more than 10,100 apartments will have been built between 2013 and the end of this year, according to Marquette.

Since fall 2011, Finance & Commerce has recorded nearly 20,200 apartments proposed or in development in the Twin Cities area. Nearly 11,100 units have been built, according to the Twin Cities Apartment Development Tracker.

Average market rents throughout the Twin Cities area continued to rise, Marquette reported, hitting $1,055 in the second quarter, up 5 percent from the same quarter in 2014.

The broader market dynamics are shifting, but Mary Bujold, president of Minneapolis-based Maxfield Research, said the changes so far don’t mean trouble for the local rental market.

“We’re not seeing as much absorption as we were earlier but that’s because we’re starting to whittle away at our pent-up demand and getting more in line with regular growth,” she said. “Downtown, we’re getting to a point where we’re starting to slow down a little bit from what we were doing in the past.” Sustained development activity in the submarket boosted competition in the second quarter, giving way to rent concessions meant to sweeten the deal for prospective tenants – and boost occupancy before the slower fall and winter seasons, Marquette Vice President Brent Wittenberg said.

For now, concessions vary and tend to focus on specific unit types and floor plans, based on what’s still open in certain developments. The renter breaks are limited, but could take firmer hold if competition continues to intensify over the next year or so, Bujold said.

Wittenberg said “modest concessions” are more prevalent in active construction markets, particularly in downtown Minneapolis.

In the meantime, plenty of property owners are keeping a tight grip on rental rates as they grapple with a fuller marketplace.

A mix of young professionals and empty nesters dominate the pool of prospective downtown renters, but other types of households have helped expand what defines a downtown resident over the past decade or so.

Going forward, the most successful developers will be ones integrating a variety of units and in-building offerings to accommodate a range of tenants – all at the right price.

“The keys going forward will be for new developments to really understand their target renter, their niche and to really differentiate what they’re offering,” Wittenberg said.

Outside the metro’s showpiece rental market, strong interest is propping up the housing stock. First-ring suburbs in particular are following Minneapolis and, to a lesser extent, St. Paul, with projects designed to increase walkability, integrate retail and commercial development and boost density.

Vacancy rates across the metro are still too low, Bujold said, exposing an opening for developers. Two of the most active suburbs for apartment projects, Edina and St. Louis Park, posted second-quarter vacancy rates of 4 percent and 1.9 percent, respectively.

The suburban marketplace won’t experience the explosive growth that’s propelled downtown Minneapolis in recent years, but favorable conditions will support continued expansion as cities implement measures to tighten a longstanding gap between project costs and accepted rental rates.

“A lot of our suburban communities are working to create the kinds of environments that are attractive to both businesses and renters,” Wittenberg said, singling out a swell of interest near the Southdale Center mall in Edina and at the West End in St. Louis Park and Golden Valley.

Virtually across the metro area, the near-term rental landscape will be helped along an expanding labor market and efforts – particularly in downtown Minneapolis – to spruce up communities to draw in new residents and workers.

“The market remains quite healthy; in fact there’s sustained demand for quality apartment products across all price points and in most submarkets,” Wittenberg said. “The fact that we’ve seen vacancies spike a little bit in downtown Minneapolis, that was predictable.”