Homebuilding in the Twin Cities ramped up last month, but rental apartment construction took a breather.

During September homebuilders were issued 650 permits to build single-family houses, a 37% increase over last year and the most for any September since 2005.

"As inventory of existing homes for sale continues to drop, we're seeing increased interest from home buyers looking to build," said Gary Kraemer, president of Housing First Minnesota and a Twin Cities homebuilder.

New-home sales have been a bright spot in an otherwise challenging economy. The industry is getting a boost from record low mortgage rates and a shortage of existing for-sale homes that's forcing many buyers to build rather than buy used.

Though the sector has so far defied the economic downturn, builders and their suppliers face headwinds. Lumber prices have been volatile and have recently risen to near all-time highs as demand exceeds the supply of some products and labor is expensive and in short supply.

"While we are pleased to see homebuilding activity continue to lead the economic recovery, we remain deeply concerned about the challenge of housing affordability," said David Siegel, executive director of Housing First Minnesota.

Nationwide more new homes have been sold through August in 2020 than in any year since 2007, boosting builder confidence to all-time highs. Last week the U.S. Census Bureau said new-home sales during August increased 4.8% from the month before. That was the strongest pace since September 2006 with the available supply of unsold homes declining to a 3.3-month supply.

During September builders were issued 697 permits to build a total of 1,135 total housing units, including apartments and single-family homes (a single permit can be issued to build more than one unit). Multifamily construction in the Twin Cities wasn't as robust last month. Developers were issued enough permits to build 485 units, mostly upscale rentals, which was less than half last year's total for the same period.

Permit issuance for big rental projects tends to be volatile from month to month, but it's also a segment of the industry that's been going strong for more than a decade.

Demand for luxury rentals helped lead the construction industry out of the Great Recession and with many parts of the metro now swimming in rentals and the COVID-19 pandemic slowing demand in some areas, there's an expectation that some multifamily developers will scale back their plans.

The biggest multifamily project permitted last month was in Woodbury, where Jcorp Inc. pulled a permit to build a 189-unit building.

Already, the strength of the residential sector has even outpaced commercial construction, which has been slammed by a pandemic-related decline in demand for retail, offices and other nonresidential uses.

A report from Dodge Data and Analytics also released last week shows that while residential construction, including multifamily, in the 13-county metro exceeded last year by 23%, nonresidential construction declined a whopping 58%.

So far this year, residential construction is down nearly 20%, less than half the decline for nonresidential projects.

Homebuilders said the pandemic has had a significant and immediate impact on where people want to live and how houses are designed.

"On top of the pent-up demand, many buyers are now looking for more space to work remotely," said Kraemer. "And are willing to look further into the suburbs as they may no longer have a commute to consider."