Twin Cities home buyers aren’t the only ones having a tough spring. Renters are, too.
In another sign of the strong housing market, more apartments were rented than new units were delivered during the first quarter. Vacancies remain tight and landlords are raising rents.
Stefanie Sokup, vice president of marketing for St. Paul-based Real Estate Equities, said that across the company’s portfolio the average vacancy rate is 2.7 percent and the company isn’t offering any concessions. The company doesn’t have any new buildings still in the lease-up phase, and many of its units are in standard, no-frills suburban buildings, which are “hitting it out of the park right now,” she said.
“It really picked up at the tail end of the first quarter and the second quarter has been fantastic,” Sokup said. “We have been able to raise rents and stay full.”
From January through March, 1,180 new units hit the market across the metro, but 1,218 units were absorbed by renters, according to a new report from Marquette Advisors. That’s the strongest quarterly performance since 2011.
The froth in the rental market is matched in the homebuying, where transactions are high but would be greater with more supply available. And construction is up in both segments, with builders having their best year for both single- and multifamily homes in nearly 15 years.
About 17,000 apartments have been built in the Twin Cities since 2010, mostly in Minneapolis and St. Paul neighborhoods where demand for big upscale apartment complexes with resort-style amenities has been strong. As units flood those markets, developers are shifting to suburbs where demand still exceeds supply, especially for apartments that are affordable to lower-income renters.
But across the metro, apartment vacancies have barely budged compared with last year. The average vacancy rate during the first quarter was 2.8 percent, up from 2.3 percent in the same period a year ago.
The market is considered balanced when the vacancy rate is about 5 percent. Including new buildings that recently opened and are still in their initial lease-up phase, the adjusted vacancy rate was still only 3.2 percent.
There’s been growing concern that the vacancy rate would increase more dramatically, but the author of the report, Brent Wittenberg of Marquette Advisors, attributes the persistently low rate to a variety of factors, including an increase in the number of new households, strong job growth and a growing acceptance of renting as a lifestyle.
That’s enabled property managers to implement modest rent increases in some areas. Last month, the overall average market rent in the metro was $1,110, a 5.4 percent increase compared with a year ago.
Rent gains, however, varied dramatically across the metro. And because a single large project can saturate a market until lease-up is finished, the apartment market tends to be volatile and vacancies can spike quickly in micro-markets. That happened in the Uptown neighborhood, where thousands of luxury units hit the market within months of one another, and near the University of Minnesota and parts of the North Loop.
The opposite is true in many second- and third-ring suburbs where there has been virtually no construction over the past couple decades and demand for rentals in every price range is intense.
Jennifer Gordon, senior vice president for the Excelsior Group, said there’s a strong correlation between rental demand and job growth, which was particularly strong. The Twin Cities added about 14,000 jobs during the first quarter, almost half the number of new jobs that were added all last year.
“The job additions aren’t likely to trend that strong all four quarters of this year,” she said. “It’s a great number [the absorption rate] to see but should be filtered through the big-picture jobs lens.”
Job growth in downtown Minneapolis, which has been the epicenter of the apartment building boom in the Twin Cities metro, has helped absorb the delivery of thousands of new units.
In the first quarter, the vacancy rate for stabilized properties was 2.7 percent, compared with 7.1 percent a year ago.
Including buildings still in the lease-up phase, the vacancy was just 3.7 percent.
Those figures, which are still below what’s considered equilibrium, have enabled property managers to maintain or increase rents. The average rent downtown during the first quarter was $1,622, a 5 percent increase over the previous year.