No rental bubble in Twin Cities – yet

Despite a barrage of new apartment buildings in the Twin Cities metro area, demand for rentals continues to outstrip supply.

The average vacancy rate in the seven-county area dipped to 2.3 percent at the end of June, causing the average metro rent price to increase 3 percent to $979, according to a second-quarter survey by Marquette Advisors. That was the largest quarterly decline in vacancy rates in two years, and the ninth consecutive quarter of vacancy rates below 3 percent.

"There are some very positive demographic, economic and lifestyle trends underway in the Twin Cities," said Marquette Advisors vice president, Brent Wittenberg.

Much of the demand is being fueled by young professionals and empty nesters who don't want to make a long-term commitment to homeownership and are interested in the perks of urban living. "People want to live close to night life and the amenities they use for recreation," said Brent Rogers of Greco Development.

For rental property owners and developers, the housing crash and subsequent recession was a turning point. With mortgages difficult to get and thousands displaced by foreclosures, demand for rentals soared. Adding to the trend was a surge in empty nesters and twenty-somethings wanting the ease and flexibility of renting.

The number of people age 55 to 64 in the Twin Cities will rise by about 6,000 per year over the next five years, Wittenberg said. Meanwhile, "Gen Yers" (ages 25-34) will expand by more than 4,000 per year.

To date, developers have had trouble keeping pace with demand, especially in Minneapolis, which is in the midst of an unprecedented building boom. Wittenberg said that in downtown Minneapolis alone, 509 units have come online so far this year, with hundreds more on the way. He expects another 2,800 to 3,200 units in 2014 and 2015.

"It leased out much faster than expected," Rogers said.

But with thousands of apartments on the drawing board, the metro market is expected to soften in the coming months, leading some to believe that a construction bubble is on the horizon. Wittenberg expects that demand will slow sometime in 2014, when the average vacancy rate is expected to hit 10 percent, but he also thinks that will quickly fall to a more sustainable 5 percent — the point at which the market is considered in balance.

Given that there's more competition on the way, Rogers expects it to take 12 to 13 months to fill a 171-unit project called Lime, an upscale building under construction at 29th St. and Lyndale Avenue S. in Uptown Minneapolis. "Our expectation is that the lease-up will be closer to a normal time frame," Rogers said.

Mary Bujold of Maxfield Research agrees that the market is headed toward modest adjustment. She said vacancy rates will also continue to be low in the suburbs, where there's been very little new construction over the past couple of decades.

"We won't see substantial changes in most of the out­lying areas because there's no new product," she said.

Despite lower rents in some suburbs, affordability continues to be a serious problem metrowide, particularly because most of the apartments being planned and built are upscale. A report released Monday by the Minnesota Housing Partnership (MHP) shows that since 2000, rents have risen by 6 percent while incomes for renters have fallen by 17 percent.

The study showed that low-wage workers in common occupations like food preparation and retail sales can't afford to rent a two-bedroom apartment in any Minnesota county, and that statewide, there are only 38 units of rental housing available for every 100 extremely low-income renters.

"When rental housing becomes too costly, all renters suffer, but the impact is especially severe for children," says the MHP's executive director, Chip Halbach.

Wittenberg said that for now, there's no shortage of people — namely young professionals and empty nesters — willing to pay for luxury digs.

"These are people who can afford to buy who are making the conscious decision to rent," he said.