As Minneapolis apartment buildings multiply, so do the lease discounts.
During July more than 45% of the Twin Cities rental listings on Zillow included free rent, discounted parking and other concessions aimed at wooing renters. That’s four times higher than last year at this time and the seventh highest share in the country.
“It definitely feels like more of a renters’ market,” said Erik McLaughlin, who is using a six-week discount worth $3,500 to move from one apartment building in Minneapolis to another. “There’s more supply than people wanting to rent.”
Developers are scrambling to fill new apartments in some parts of the Twin Cities amid an unprecedented — and unpredictable — confluence of challenges: the COVID-19 pandemic, a summer of civil unrest in Minneapolis and St. Paul and rising crime rates in parts of the city.
“I don’t think it’s all that surprising that we’re seeing a very dramatic shift,” said Cecil Smith, a Twin Cities rental property owner and president of the Minnesota Multi-Housing Association. He says the situation is most challenging in new luxury buildings in and around downtown Minneapolis.
The sudden and recent increase in rent concessions is a turnabout for the Twin Cities, which for nearly a decade has had one of the tightest rental markets in the country. This summer, though, developers in some parts of the metro are pulling out all the stops to lure renters to new, upscale buildings that aren’t filling as quickly as anticipated, forcing owners to offer concessions rather than rent reductions.
“They’d rather take a one-time hit than a price cut,” said Zillow economist Joshua Clark, who says that average rents are still on the rise across the Twin Cities.
Across the metro, rents are still increasing because there’s a dire shortage of apartments that are affordable to moderate-income renters, especially in urban areas and inner-ring suburbs where demand is strongest and construction costs are the highest.
Though a record number of apartments have been built in recent years, most are high-end buildings that are clustered in areas hardest hit by the COVID-19 pandemic and social unrest. Minneapolis, for example, accounts for about 40% of the planned apartment construction in the metro.
That puts renters who can afford those new buildings in the driver’s seat. McLaughlin and his roommate, for example, have been renting an upscale apartment along a busy stretch of Lake Street in the Uptown neighborhood. They’ve grown weary of the congestion and have “outgrown” the area, McLaughlin said, so they are moving to the North Loop neighborhood where apartment construction has been robust and property managers are competing for renters.
In the North Loop their first choice was a building that offered one month free rent, but they were able to persuade that building manager to match the six-week discount that’s being offered by a nearby competitor, covering the $3,500 cost of breaking their lease.
“There’s a lot more options for renters right now if you want to stay in Minneapolis,” he said.
Amy Johnson, director of marketing and leasing for Roers Cos. and Core Living, estimates that about 80% of the properties in the Uptown and downtown areas of Minneapolis are offering concessions. Far fewer are being offered in the suburbs. She said when the company opened the Maven Apartments in Burnsville in mid-April, they were able to fetch rents that are 10% higher than expected and the building is now 95% occupied without offering any concessions.
“Leasing volume has remained steady, and we’re beginning to see renters moving to Burnsville from downtown and Uptown,” she said. “This is likely tied to both the unrest and violence in Minneapolis as well as the increased flexibility many workers are now experiencing as businesses and employees shift to remote work.”
In contrast, at its Venue Apartments in downtown Chanhassen, half of the apartments were occupied when it opened about a year ago. By spring leasing velocity slowed and the company offered concessions including free parking and storage units.
The same is true at some of its properties in Minneapolis, where its Mezzo and N & E Apartments are offering minor concessions to help attract renters after opening this spring at 50% occupancy.
“Some of this is seasonal,” said Brent Wittenberg, vice president of Twin Cities-based Marquette Advisors. “But it is definitely more pronounced this year.”
At the end the second quarter the average vacancy across the metro increased only slightly from last year to 4.2%. Wittenberg said vacancy rates remain artificially low because of the economic stimulus, unemployment subsidies and eviction moratorium, but he expects the average vacancy rate in the metro to at least double by the end of the year or early 2021.
He attributes much of that increase to a flood of new units in downtown Minneapolis, where the average vacancy downtown was 9.1% at the end of June and is expected to climb higher by end of the year when more than 1,400 new units are completed.
In early May, two weeks before the police killing of George Floyd, Wittenberg said he expected about 32,000 units to be built metrowide over the next three years. Despite projects falling off the drawing board, he’s still expecting 25,000 to 27,000 new units.
Jennifer Gordon, president and partner of multifamily for the Excelsior Group, which manages more than 4,500 rental units throughout the metro, said that when it comes to concessions, the metro is deeply bifurcated between the cities and the suburbs where construction has been relatively limited.
She said concessions are likely in a half-dozen buildings still filling up, but in many of the nearly 20 buildings the company manages, occupancy is well over 90%. “None of them are doing concessions,” she said.
That’s true in even some urban areas with prime locations and high-demand amenities. At Vesi Apartments, a new rental building overlooking the Mississippi River in the North Loop that fully opened a few weeks ago, Gordon said occupancy is already at 45% without concessions.
She and others say the downturn in the rental market has yet to provide relief to many lower-income renters because they’re living in inexpensive buildings that remain in short supply, and even with these discounts these rents will still be out of reach of many working-class renters.
The region is still suffering from a chronic lack of rental housing that’s affordable to lower-wage earners, enabling owners of those buildings to implement the kinds of rent increases that have been typical over the past several years.
“It’s the top end and newest, higher-end properties that will likely see the biggest discounts due to more supply built over the past few years,” she said. “Sadly, it’s not necessarily going to make housing more affordable to those in the most-affordable realm.”