The hot apartment market heats up further as appetites shift away from ownership.
Whether bruised by the housing crash or battered by the economy, more people are taking a pass on homeownership.
The percentage of homeowners in Minnesota has fallen to its lowest level in almost 20 years, as demand grows for rental housing at a time when the supply is already tight.
Even as thousands of new rental units are added across the Twin Cities metro area, vacancy rates remain at historic lows, and rents are on the rise. It's a trend that's being driven, in part, by the economic recovery, analysts say, as well as the hesitance among some to buy a home after the housing collapse.
"Renting is becoming more and more of a lifestyle choice," said Angie French, president of the Minnesota Multi Housing Association.
Some developers say this is the strongest rental housing market in at least 20 years, and they have been taking advantage by adding thousands of units over the past year. And by all accounts, the rental market still wants more. Despite the increase in rental units, the average apartment vacancy rate during the first quarter remained unchanged at 2.8 percent, Marquette Advisors reported last week.
"We expect continued strong demand for rental housing," said Brent Wittenberg, vice president of Marquette Advisors. "Demand is expected to outpace new construction for 2012."
One of the tightest rental markets in the metro area is along the eastern edge of Minneapolis, including neighborhoods surrounding the University of Minnesota, where the average vacancy rate was only 1.2 percent. That's where Opus Corp. has one rental building under construction and another planned. In addition, the company is expanding around the city with plans for about 650 units.
Curt Gunsbury, owner of the Solhem Companies in Minneapolis, also is building several hundred units in those neighborhoods. "And we don't have any vacancies," he added.
About 71 percent of all Minnesota households owned their home last year -- the lowest annual rate since 1993 when the rate stood at 68.9 percent, according to census numbers. Homeownership fell again during the first quarter of 2012 to about 70 percent. Across the country, homeownership is around 65 percent.
During the height of the housing bubble, the homeownership rate in Minnesota was one of the highest in the nation, hitting 79 percent in early 2005.
Small numbers, large effect
While the declines seem marginal, they represent a significant number of households that have the economic power to radically change development trends across the country. With about 114 million households nationwide, every 1 percent drop in ownership rates translates into about 1.14 million units of additional rental demand, according to the Census Bureau.
In Minneapolis, the downtown vacancy rate was 1.9 percent for the quarter, down from last year when it averaged 3.5 percent. Vacancies were low in most urban and suburban sub-markets, and Marquette Advisors said all but one of the 10 major sub-markets had a vacancy rate below 4 percent. The vacancy rate in downtown St. Paul was 5.1 percent.
More than half of all housing units planned for the Twin Cities so far this year are apartments, and there are already more than 3,500 units under construction in the metro. Nearly 1,000 new units have already been added to the rental pool during the past year, and another 1,114 will be completed in 2012, according to Marquette Advisors.
Nearly 1,000 units are expected to hit the market next year, said Marquette Advisors' Brent Wittenberg.
For now, those low vacancy rates mean landlords are able to charge higher rents. The average rent price for all units last quarter was up 2.2 percent. The average rent price, for example, was $935.
While there are plenty of new units coming to market, Guns-bury said he doesn't anticipate an increase in vacancies anytime soon. In addition to strong demand from students and employees at the rapidly growing University of Minnesota, he sees an increasing number of renters who aren't able to buy a home, or simply don't want to take the risk, given the long, slow housing recovery.
"If you're a renter, there are lots of people like you in the city," he said. "And you're seen as the smartest guy right now."
The decline in homeownership and the increase in rentals coincide with an economic thaw that's enabling more people who shared housing expenses to save money during the recession to now buy a house or rent an apartment. Demographers call the trend "de-bundling."
Looking ahead, Wittenberg expects demand to outpace construction this year, and that's why he doesn't expect the overall metro vacancy rate to increase in the months ahead. But individual sub-markets could see vacancies rise as units come online. The situation is a little less clear when the bulk of what's being proposed gets completed in 2013 and 2014, Wittenberg said.
"That timeframe will be an interesting one for all of us in the industry."
Jim Buchta • 612-673-7376