Rising mortgage rates increase demand for apartments in Twin Cities

Apartment leasing in the Twin Cities is soaring at a time when rising mortgage rates — and home prices — are putting homeownership out of reach for a growing number of households.

During the first nine months of the year renters occupied an additional 6,600-plus rentals across the metro area, according to a third-quarter report from Marquette Advisors. That was a 12% increase over 2021 and nearly double the 2017 to 2019 pre-pandemic average.

Citing CoStar's national index, Marquette said year‐to‐date absorption across the country during the third quarter was 40% lower than the pre‐pandemic three-year average.

"In almost all of our markets there's huge demand because there just isn't enough housing," said Santo Dettore, associate vice president of development at Northland, a national multifamily owner, operator and developer that recently broke ground on a 194-unit expansion of the SoRoc on Maine apartments in Rochester.

The company acquired the community in February. When the new apartments are expected to be completed in early 2024, the entire project will have 380 rentals in several buildings.

Dettore said market fundamentals in the Twin Cities are especially strong, and the company is looking for other development opportunities in the metro area and Rochester.

"We have seen continued and sustained demand with supply only slowing," he said. "In other markets, rent growth has slowed."

Steady increases in apartment construction over the past several years has helped relieve what had been a dire shortage of rentals. The market is considered balanced between renters and landlords when there's about 5% average vacancy rate. Until 2020, the vacancy rate remained below 3.5%.

During the third quarter of this year, however, the vacancy rate in the Twin Cities metro area was 4% compared with 3.9% a year ago. Rents remained steady compared with the previous quarter but were up nearly 6% over last year.

Demand varied dramatically by submarket. Collectively, suburban markets reported a vacancy rate of 3.5% during the third quarter, compared with 5.3% in Minneapolis and 5.0% in St. Paul.

The highest vacancy rate was in the Lakeville/Farmington area at 16%. Downtown St. Paul, downtown Minneapolis and Richfield posted vacancy rates in the mid-7% range. Vacancies were lowest in Blaine and Falcon Heights/Lauderdale, less than 2% in both areas.

In both downtowns, the average vacancy rate is lower than during the beginning of the pandemic but still in favor of renters. In both, there's more supply than demand, and some buildings are offering slight rent reductions and one-time rent concessions.

The national real estate research firm Yardi said that across the country, asking rents increased $3 in October to $1,727. Year-over-year, rents increased only 8.2%, the lowest level since last summer and down from a peak of 15.3% during the first quarter.

The Marquette Advisors figures do not include income-restricted and senior housing, which is even more scarce in the metro area.

Normally, demand for rentals is driven by employment growth, in‐migration and household formation, all of which are more tepid than normal. Instead, Marquette attributes the increase in rentals to higher mortgage rates that made it difficult for a growing number of people to buy a house.