Apartment building owners have more space on their hands

The apartment vacancy rate in the Twin Cities has climbed to the highest level in several years, mostly because of the dismal job market that has unemployed young people moving back with Mom and Dad and other folks sharing units.

The average vacancy rate in the metro area hit 7.3 percent at the end of 2009, according to the Minneapolis office of GVA Marquette Advisors, a real estate consulting firm. That's the highest rate since 2004 and a big jump from the 4.9 percent average vacancy rate at the end of 2008.

It's an increase clearly tied to lower demand rather than overbuilding. GVA said just 615 new market-rate apartment units were built in 2009, down almost 50 percent from 2008. Just 500 units are expected to come on line this year although they include some highly watched projects, such as Mill District City Apartments, a 175-unit building near the Guthrie Theater in Minneapolis, and the Ellipse, a 133-unit building in St. Louis Park.

The rental market also was hit late last year when the federal tax credit for first-time home buyers kicked in, prompting many renters to take advantage of the tax break at the same time that the depressed housing market offered low prices. The tax credit initially was to expire last November but was later extended for purchases that close by June 1. That has the potential of keeping things difficult for landlords, especially since there are few signs that the job market will improve anytime soon.

The soft rental market has forced many landlords to forgo rent increases; GVA's figures show average monthly rent in the area unchanged from 2008 to 2009 at $906 a month. But those numbers don't take into account concessions -- like offering apartments rent-free for a month or two -- that some building owners have had to make to attract tenants.

"Everybody's doing it -- you have to in order to stay competitive," said Robert Levine, president of St. Louis Park-based KMS Management Inc., which owns and manages about 35 rental properties in the Twin Cities. KMS recently has been offering one month free for people signing 12-month leases at seven of its properties in Minneapolis.

Apartment building owners also are working harder to keep the tenants they have, said Brent Wittenberg, GVA vice president. "There just aren't the renters out there to backfill units if someone moves out," he said. The cost of turning over an apartment can run from $500 to $700 and even higher if a unit sits empty for long, said Jewel Dilworth, regional manager for Greystar Management Services, which manages five apartment properties in the Twin Cities. It's a dilemma for landlords, and one that has given some renters the upper hand in getting concessions like flexible lease terms or even reduced rent.

Phillip Birt said he is getting a $200-a-month break on rent for a two-bedroom apartment he recently moved into at River Crossing in St. Paul. Birt, 24, relocated from a three-bedroom unit he previously occupied for a year in the same multi-building complex.

Birt said he decided to downsize and spend less on rent because he had to dip into his savings to pay rent when he was laid off early last year. He's employed now but said he told River Crossing's managers he was looking around for another cheaper place to live.

"They seemed very eager to keep me. It's easier for them than finding somebody new," he said. Besides the rent reduction, Birt said he now gets underground parking free instead of paying $70 a month.

The reduced rental revenue already has created financial pressure for many apartment building owners. There were 87 foreclosures on apartment buildings in Hennepin County in 2008 and 54 through Sept. 30, 2009, according to the county's taxpayer services department. In the past two years, apartment buildings accounted for the biggest portion of the county's foreclosures on commercial property.

Apartment buildings also accounted for a significant portion of Twin Cities area properties delinquent on debt tied to commercial mortgage-backed securities (CMBS) at the end of last year, according to figures compiled by Trepp, a New York-based real estate research firm. CMBS are commercial loans that have been packaged together and then resold in pieces to institutional investors.

Trepp's figures include delinquencies for some large and longtime area rental property managers, such as Circle Pines-based Uppal Enterprises. The firm has been in the multi-unit housing business for more than 30 years, said President Vik Uppal.

Trepp shows Uppal as delinquent at year-end on about $13 million in debt on Village Plaza Apartments, a 122-unit complex it developed in 2005 in Circle Pines. Vik Uppal said the debt problem is mostly because part of the property was originally built as condominium units, but later converted to apartments when the condo market weakened. The condo units were built at a higher cost because their finishes -- countertops, cabinets, carpeting -- were more expensive, he said.

"We continue to work with our lenders to resolve [the delinquency], he said.

Would-be condos that wind up as apartments don't show up in vacancy rate figures but result in a so-called "shadow market" of available rental units. Wittenberg and other area industry experts said the Twin Cities's shadow market is fairly small because the condo market here was not severely overbuilt like other parts of the country such as Florida and California.

Susan Feyder • 612-673-1723