Apartments in the Twin Cities are filling up as fast as they become available, sparking a wave of new rental development unlike anything the metro area has seen in decades.
Though hundreds of new apartments were built last year, the average vacancy rate remained largely unchanged at a scant 2.9 percent, according to Marquette Advisors, a national research firm. Rental prices climbed slightly to an average of $957, suggesting that peak demand is still ahead.
"It can't get any better," said Kelly Doran, a developer who owns several hundred apartments in Minneapolis. "Everything we have is 100 percent occupied."
The rental market is in the midst of a historic expansion that's being driven by broad demographic and economic changes. With the memory of the housing crash still fresh, some would-be home buyers are worried about the risks of taking on a mortgage, while others are having trouble getting one. Many baby boomers, in turn, are in search of simpler lifestyles, swapping homeownership for the flexibility and ease of rentals.
It's a shift that's rejuvenating the construction industry as developers have announced plans to build more than 14,000 units in the coming year and beyond, mostly in Minneapolis and several inner-ring suburbs.
"The Twin Cities is now one of the nation's busiest markets in terms of apartment construction," said Brent Wittenberg, vice president for Marquette Advisors. He cites a diverse state economy that's producing more jobs than the national average.
In fact, until the end of the recession, vacancy rates in the Twin Cities had been hovering above an anemic 7 percent. Since then, vacancies steadily declined before settling below 3 percent over the past seven quarters, according to Marquette, which tracks more than 115,000 rental units across the seven-country metro area.
When Chelsea and Erik Walker recently moved back to the Twin Cities from Naples, Fla., with their 1 1/2-year-old daughter, they considered buying a house in their old Minneapolis neighborhood. They ended up renting a two-bedroom loft-style apartment in a converted brick building in the Warehouse District, one of the hottest Minneapolis neighborhoods for rental development.
"We've always wanted to live in a loft, and we just love it," Chelsea Walker said.
On nearly every block, there's an apartment complex under construction, or a building being renovated into apartments. Shops and restaurants are popping up to serve hundreds of new residents, and neighborhood groups are busy planning another new park.
At the busy intersection of Washington and Hennepin Avenues, a partnership between Ryan Companies and the Excelsior Group is building several hundred luxury apartments atop a new Whole Foods store. Down the street, locally owned boutiques are replacing factories and boarded-up windows.
And still, that neighborhood and others in Minneapolis have yet to feel the full impact of the rental boom, market watchers say.
During 2012, only about 300 new units hit the market in downtown Minneapolis, according to Mary Bujold, president of Maxfield Research Group. This year, more than 2,300 units, including two luxury high-rise apartment towers, are expected to be ready for residents.
"We're still in catch-up mode," said Bujold, referring to the lack of development over the past decade.
Already, the budding good times have some wondering if the rental market is another real estate bubble waiting to burst. While there's still plenty of pent-up demand, Bujold said, vacancy rates could soften considerably if too many buildings hit the market at the same time.
Doran, who has several hundred units under construction, said that predicting how many new units the market can absorb is difficult because developers don't know how many of today's renters will become tomorrow's buyers. "People are making different decisions than they used to make," he said.
Jennifer Gordon, vice president of asset management for the Excelsior Group, agrees. She said that there's no doubt vacancy rates will increase as new units make their debut. Still, that may be a good thing, she noted, as it will keep the market -- and prices -- in check.
For now, she and other rental developers have been enjoying the rush, pre-leasing new apartments ahead of schedule.
"There's a real sense of urgency that we haven't seen in at least a decade," she said.
When the Walkers returned to the Twin Cities in December to shop for an apartment, they were surprised at the shortage of options.
That's why they were thrilled to happen upon ElseWarehouse, which is on a street that's lined with bustling restaurants. Their new light-filled apartment in a former factory has gleaming hardwood floors and soaring ceilings. Best yet, Chelsea Walker said, they're only obligated by a yearlong lease.
"Renting enables you to have more flexibility," she said. "We could have bought, but we couldn't find what we wanted and didn't want to jump into something too quickly."
Jim Buchta • 612-673-7376