Twin Cities area is no renter's market, but it will start to tilt that way in 2017

With apartment developers hammering their way into a new year, the rental market in the Twin Cities is about to shift.

Construction this year will outpace 2016, but it will move from the cities to the suburbs. Rents will rise, but not as steeply as in recent years. And while the vacancy rate is still below average, there are places where it's becoming a renter's market.

"I'm pushing rents this year," said Mark Jensen, president of Steven Scott Management, which operates rental properties throughout the metro area. "But there are pockets where there's too much supply."

An estimated 3,245 new units hit the market in 2016, according to Marquette Advisors, and another 4,200 units are expected to arrive in 2017.

Though the Twin Cities continues to be one of the strongest rental markets in the country, the market will move closer to equilibrium this year — good news for renters who have been at the mercy of landlords for several years.

Brent Wittenberg, vice president of the Twin Cities office of Marquette Advisors, expects the average vacancy rate across the 13-county metro area to increase slightly to about 4 percent by the end of the year. Rents, which have outpaced wage growth in recent years, are expected to increase only 2.5 percent to 3 percent.

"Slight moderation in demand, paired with supply increases equals downward pressure on rents in some submarkets," Wittenberg said.

It's a different story in several second- and third-ring suburbs, where there's been virtually no construction over the past several years and there's already a dire shortage of options, especially for those with a limited budget.

Developers are following that demand, mostly with new luxury buildings in the most "urban" suburban locations where residents can walk to shops, restaurants and parks. That includes new building in shopping center parking lots and on sites that are adjacent to corporate campuses.

With the apartment boom maturing, there are growing concerns across the country that there are already too many units. The U.S. Commerce Department recently released data showing that the rate at which new apartments are being rented has begun to slow.

Those concerns come in the midst of a fundamental shift in attitudes toward renting driven by an unusual combination of economic and demographic forces. Large numbers of millennials and baby boomers are renting by choice, a trend that is expected to fuel demand for new apartments in the coming year.

Job growth in the region so far this year, for example, has outpaced 2015 by nearly 20 percent, and many of those jobs are being filled by people who want to rent because it offers them the flexibility to move whenever they want.

The depth of the rental pool today is still unknown, but developers are optimistic. The leading edge of the baby boomer generation is now moving into retirement and there's an assumption that they'll want to trade their big house in the suburbs for an apartment in the city.

"They're gobbling up a lot of these new units today, but they're a wild card," said Jensen, the Steven Scott executive.

The coming shift in the market is also expected to have an impact on investors in the Twin Cities. For three years in a row, apartment building buyers — mostly institutional investors from out of state — have paid record prices for Twin Cities properties, but some brokers expect transaction volume to fall this year.

"We will continue to see increased demand," said Gina Dingman, president of NAI Everest, a commercial real estate brokerage. "But increased interest rates and overall transaction costs will cause buyers to offer less for the same property they may have paid more for a year earlier."

Jon Fletcher, senior development manager for LMC, a national developer building a 20-story apartment tower in northeast Minneapolis, said lenders are becoming more selective about which projects they'll finance.