The Twin Cities apartment boom, which is transforming Minneapolis and St. Paul, is now thundering into the suburbs, where rentals are full and there’s plenty of developable land.
Last month, the average vacancy rate across the 13-county area was just 2.5 percent, according to new data from NAI Everest, a local brokerage. The average monthly rent in the Twin Cities is now $1,051, up 6 percent from a year ago in an economy where inflation and wage growth are flat.
With a healthy economy and demographics in its favor, the rental market in the Twin Cities remains one of the strongest in the nation.
“Developers, owners and buyers are bullish on the market,” said Gina Dingman, president of NAI.
Apartment brokers across the metro have been overwhelmed by out-of-town investors looking for rich returns and a place to park their money. Dingman recently spent time with an investor from South America. “The market fundamentals are phenomenal,” she said.
And after five years of intense development in the core cities, the action is shifting to the suburbs where there’s been relatively little building since the 1980s.
In the eastern suburbs, for example, the average vacancy rate was just 1.5 percent compared with 6.6 percent in downtown Minneapolis.
Patrick Carson, a leasing director for the Downtown Resource Group in the North Loop neighborhood in Minneapolis, said that while there are growing concerns about too much supply in some parts of Minneapolis, buildings in the hottest locations are still commanding high prices.
At the Paxon North Loop, for example, DRG was able to lease 60 percent of the units four months after the building opened last year. That was without concessions and after five rent increases. “People are still getting crazy rents,” he said.
The NAI report showed that the average rent in downtown as of June was $1,320, up 10 percent over last year.
Investors are paying more, as well. A blue-chip New York investment firm recently paid a near-record price for the Paxon North Loop, and it then paid more than $300,000 per unit for another North Loop building called Velo.
The situation is creating challenges for low-income renters. The average vacancy rate at income-restricted buildings in the Twin Cities was just 1.7 percent and only 1,000 new units have been built since 2013. That’s compared with 10,000 units that have no income restrictions.
Development is beginning to moderate in downtown Minneapolis, where renters signed up for 886 units so far this year, slightly more than the total number of new units that came available for rent.
But in the suburbs, demand is deepening and projects are leasing up well ahead of expectations.
From April through June, 787 luxury units came online in the suburbs, including MartinBlu, a 192-unit development in Eden Prairie, and Boatworks Commons, an 85-unit project on White Bear Lake. Both projects opened in April and were over 70 percent leased by July.
Since opening in January, the second phase of Edina’s One Southdale Place, where rents average $2.32 per square foot, is already 70 percent leased.
“There is room for developers to increase rental rates,” Dingman said.
Nationwide, the decade is on pace to be the strongest for renter growth in history. The apartment vacancy rate has dropped to its lowest level in nearly 20 years as Americans shifted away from owning houses and condos after the 2008 downturn. The rate of homeownership has plunged, erasing nearly all of the gains from the previous two decades, according to Harvard’s Joint Center for Housing Studies.
Despite so much positive data in the Twin Cities rental market, it’s unclear how long and how intensely the trend will persist.
Kelly Doran, principal of Bloomington-based Doran Companies and one of the region’s most active developers, said that while the second phase of his Mill & Main project across the Mississippi River from downtown Minneapolis is 78 percent leased after just three months, he’s growing cautious.
“Nobody really knows how big that market is,” he said. “I don’t think it’s overbuilt today, but the question is ‘Will it get overbuilt?’ ”