A turn nears in the building frenzy of Twin Cities apartments

Finding an apartment is still difficult in many parts of the Twin Cities but, with new ones being built at breakneck speed, that's beginning to change.

For the first time in more than five years, the average vacancy rate in the Twin Cities metro topped 3 percent, according to a first-quarter report Marquette Advisors. And while that is still far short of the 5 percent mark at which the market is considered balanced, developers are about to tap the brakes after delivering a near-record number of new rentals this year.

"The slowdown is happening and it's real, but the market will remain in balance," said Brent Wittenberg, vice president at Marquette Advisors, at a recent gathering of the Minnesota Multi-Housing Association in Minneapolis. "There will be winners and losers."

While the data show that the market is shifting in a meaningful way, especially in downtown Minneapolis and Uptown, Wittenberg said, the Twin Cities is still one of the strongest markets in the U.S. The average monthly rent across the metro during the first quarter was $1,072.

Generally, rent growth in parts of Minneapolis and St. Paul have outpaced many suburban markets. In downtown Minneapolis, though the vacancy rate is about 7 percent, rents were up 7.7 percent. That's compared with a 2.5 percent increase in Bloomington.

While renters are indeed paying more, the first-quarter figure received a boost from hundreds of expensive luxury apartments that have been built during the past several years. During the first quarter alone, 381 new units opened, but by the end of the year Wittenberg expects about 3,900 new market-rate apartments in nearly 30 new projects to come online. That's up from 3,300 new units last year but below 2014's 4,400.

As the homeownership rate fell in recent years, apartment construction led the real estate industry out of the recession. Even though record numbers of rentals were being built, the average vacancy rate in the metro hovered in the low 2-percent range. Even as recently as the last quarter of 2015, the average vacancy rate in the metro was still only 2.3 percent.

The market has begun to slow in part because many aging millennials are buying houses and many baby boomers have been slow to downsize, creating a bit of uncertainty for apartment developers about what to build and where.

Gina Dingman, president and director of NAI Everest, a national commercial real estate brokerage, said that in some submarkets several large buildings have opened at the same time, creating a temporary glut. And in other cases, developers have built buildings in mediocre locations that lack the kind of important features, including a walkable neighborhood and proximity to public transportation and shopping, that renters now want. And some buildings simply suffer from a lack of amenities, or have floor plans that are not functional.

During the past three years, about 11,000 new apartments have hit the market, but only about only about 10,000 have been absorbed. Wittenberg said that the annual absorption rate is expected to slow a bit more, causing the average vacancy rate to top out at 3.6 to 3.8 percent by end of the year and rise above 4 percent in 2017. Rent gains are expected to moderate, as well, with increases in the 2.5- to 3-percent range in the short term.

Jennifer Gordon, a senior vice president with Twin Cities-based Excelsior Group, said that despite shifting market conditions there's still plenty of pent-up demand.

During a recent Explore Downtown Living event aimed at showcasing housing options in the city, the bulk of the 3,200 apartment tours that took place were people living in the suburbs who want to move downtown over the next one to three years. And about 25 percent of the rental prospects, she said, are from out of town. "So the jobs are still bringing new people to the market," Gordon said.

One of Excelsior's most recent management projects is the Edition, which flanks two sides of the Commons park that's being built near U.S. Bank Stadium. The first 30-unit phase opened on March 1. So far, the response has been strong even though the first quarter is typically the slowest time of the year.

"We have seen a little softening in occupancies across the market, but that is pretty standard for the first quarter," Gordon said. "But things are picking up again."

Jim Buchta • 612-673-7376