It's a renaissance for rentals

On a crystal clear January night, in the wake of the worst housing downturn since the Great Depression, Minneapolis officials gathered in the swank lobby of a new apartment building a block from the Mississippi River to toast the project. Most of the apartments were vacant, the indoor-outdoor pool still dry and a living "green" wall had just been planted, but city officials were already hailing the project as a success.

It has been. Just six months after the celebration, Village Green says they've rented the last of the 175 units at the Mill District City Apartments. "Despite building this apartment building in a very bad economy, we leased up faster than we have ever before in any economy," said Jonathan Holtzman, Village Green's chairman.

Holtzman is already fast at work planning his next two projects. Dozens of Twin Cities-area developers have unveiled plans to build upward of 6,000 rental apartments, most of them in Minneapolis, in what some are calling the biggest boom in rental housing construction in several decades.

Many of the projects are on sites once slated for condos, which dominated construction activity in the Twin Cities for a decade before the recession killed demand. Some are slated for former office buildings, a sector of the real estate market still hurting from the recession, with vacancy rates that still hover near the 20 percent mark.

The deluge of proposals for apartment buildings is more than just the latest real estate trend. Developers see it as a fundamental shift in how we live, as a growing number of families give up the American Dream of homeownership for the freedom of renting. For decades, families rented because they couldn't afford to buy or didn't have the credit to get a mortgage. That's no longer the case, as the new breed of renter often does it by choice: empty nesters ready for a simpler life; younger couples who have lived through the sinking values of homes the past few years and want to avoid it altogether.

There are also financial considerations, according to Toby Madden, regional economist for the Federal Reserve Bank of Minneapolis.

"Fewer people are considering homeownership as an investment," he said. "They're thinking 'Why don't I just rent?'"

To be sure, not everyone is renting by choice. During the housing boom, mortgages were easy to come by, sometimes without a down payment. Now, lenders have tightened policies, putting home loans out of reach of many Americans. Also, many people aren't confident about their jobs, so are unwilling to take on the long-term commitment of a mortgage.

Whatever the reason, rental vacancy rates are falling. During the first quarter in the Twin Cities metro area the average vacancy rate has fallen by half, to just 3 percent, the lowest in five years, according to GVA Marquette Advisors, which tracks rents and vacancy rates throughout the metro area. GVA expects the vacancy rate to continue falling.

"There's demand at all price points," said GVA's vice president, Brent Wittenberg.

Wittenberg said that because there's been so little construction over the past decade, there's a shortage of options in some areas, especially for higher-end rentals. He said that in the Twin Cities last year, renters occupied an additional 6,400 units at a time when only 565 new units were added to the inventory and that he expects a similar trend this year. In Minneapolis alone, which is where much of the demand is concentrated, he expects 450 new units to come to the market by the end of the year, and possibly another 3,000 by 2013.

"Most of them are well-conceptualized and well-designed," he said. "What needs to happen, though, is they need to be differentiated such that they all aren't competing."

Currently, many of the projects that are being planned are on sites once slated for condo projects, hotels or in underused office and warehouse buildings. For example, Bloomington-based Doran Cos., which is building hundreds of student housing units near the University of Minnesota, snapped up a prime lender-owned riverfront site next to the Pillsbury A Mill, where it and Plymouth-based Dominium plan to build nearly 600 upscale rentals in two different projects. That site was until recently slated to become upscale condos.

And Greco Real Estate Development, which is developing the 216-unit Flux project in Uptown, is about to convert two warehouse buildings along Washington Avenue in the North Loop neighborhood into nearly 240 upscale apartments.

An announcement is expected soon on a deal to convert the historic Soo Line building -- a 19-story office tower at the corner of 5th and Marquette in downtown Minneapolis that was supposed to have become a hotel -- into apartments.

A similar trend is taking hold in several inner-ring suburbs such as Bloomington, where there's a dearth of rental options because developers spent so much of the past decade focused on building condominiums and townhouses.

And in Blaine, Hans Hagen Homes, best known for building and developing large suburban housing developments, is now in the midst of completing the first phase of its North Bay Rental Townhouses, a $20 million project in the Lakes neighborhood. Plans call for 175 townhouses with monthly rents ranging from $1,025 to $1,625 a month. Hans Hagen said that job growth in the area translates into stronger demand for rental housing, and so he's decided to accelerate plans to build the second phase.

With the rental market barely a couple of quarters into a recovery and the recession still struggling to gain traction, some developers are already wondering how many new units the market can absorb. David Frank, a former project manager for a private sector developer who has been hired by Minneapolis to head up development efforts in and around the city's light-rail transit corridors, acknowledges that if all the units that are now proposed come to market at the same time, there could be big trouble. But he downplays that possibility, saying that because lending standards are so stringent developers can't get their financing until they've proven demand or are willing to make a significant equity investment.

In addition, Frank said, the approval process can take years, meaning that some of the buildings might never get built. Village Green's Holtzman predicts that only 50 percent of the units that have been proposed will actually get built.

Mary Bujold, president of the Maxfield Research Group, saw similar rental construction booms during previous housing downturns in for-sale housing. She says that it's too soon to tell if plans are overextended "My crystal ball is too cloudy right now."