Though thousands of new apartments hit the market in the Twin Cities this year, the vacancy rate has barely budged — and that means renters are paying more.
The vacancy rate for apartments across the Twin Cities metro during the third quarter was 2.5 percent, unchanged from last year and up slightly from the previous quarter, according to a quarterly survey released Wednesday by Marquette Advisors.
When including new buildings that are still in the lease-up phase, the adjusted vacancy rate for the quarter was 3 percent, up from 2.7 percent in the previous quarter and 2.9 percent a year ago.
"It looks like we'll finish 2017 in line with expectations," said Brent Wittenberg, a vice president at Marquette Advisors.
Wittenberg expects apartment deliveries by the end of year to top 3,500. But with apartments renting quickly, he expects the vacancy rate at the end of the year to increase only slightly. That could change in the coming year when 5,000 new units are expected to hit the market. While that's a record for a single year, Wittenberg expects the vacancy rate to remain within a healthy range.
So far this year, apartments are filling faster than they are being built. Year-to-date, 2,149 units were absorbed by renters compared with 1,910 new deliveries.
Demand for rentals is being fueled by robust job creation, which is creating a steady flow of new residents who need a place to live.
The Twin Cities added more jobs in the first nine months of the year than it did for the full year of both 2016 and 2015, according to the state Department of Employment and Economic Development. Many of those new workers are renting.
Deep demand and an increase in expensive new Class A rentals caused the overall average market rent to increase 3.2 percent to $1,147.
Wittenberg said that based on current projections, even if developers deliver 5,000 units as forecast, he expects the vacancy rate to remain below 5 percent for 2018.
"As a whole, the market remains in balance," he said. "But different submarkets will see more head-to-head competition as new units are absorbed."
Downtown Minneapolis, for example, will get another 1,400 units in 2018 following 688 new units in 2017 and 465 in 2016. That's causing a slight delay in absorption rates in downtown, while demand is increasing in downtown St. Paul where the average vacancy rate was 4.3 percent, a slight decline from last year.
Herb Tousley, director of real estate programs at the University of St. Thomas, said that to a certain extent the rental market is being buoyed by a shortage of new and existing homes for home buyers.
That's forcing many would-be home buyers to remain in rental housing for a longer period of time than expected, putting pressure on rents.
Already, the Twin Cities is one of the tightest rental markets in the country, he noted, with rent growth outpacing expected wage and income growth.
"It will take more new home construction and many more new listings to get the housing market more balanced in terms of supply and demand," he said.