As renters gobble up new Twin Cities apartments, developers aren’t keeping pace

At a time when home building is on the decline, renters in the Twin Cities have been signing leases for apartments faster than developers can construct them, putting the squeeze on apartment shoppers and boosting rents.

During the first half of the year, renters signed on 4,800 apartments — the most in decades — when builders completed only 4,533 apartments in the same span, according to a second-quarter report from Marquette Advisors.

The rental market is evenly balanced between supply and demand when the vacancy rate is at 5%, but by the end of June, the average vacancy rate across the metro dipped to 3.9%, the report said.

Strong demand means higher rents, which on average increased 2.9% year-over-year. Those gains varied dramatically from one city to the next, with the biggest increase (4.2%) in the southeast suburbs. Rents declined slightly in the southwest metro where several new apartment projects opened recently. Rents were essentially flat in both Minneapolis and St. Paul, which both saw robust construction in recent years.

“With the exception of downtown Minneapolis and some micro-markets within the southwest metro area, the potential is there for more substantive rent growth in 2025 in many submarkets,” Brent Wittenberg, senior vice president for Marquette Advisors, said in the report.

Across the metro, however, there’s a shortage of housing of all sorts, causing home prices to rise to record highs. Still, developers are retreating because higher mortgage rates and a restrictive lending environment have made it difficult to finance new projects, including those for rent and for sale.

“Financial feasibility is the primary challenge for most within the current interest rate environment,” Wittenberg said.

Earlier this week, Housing First Minnesota, a trade group for homebuilders, issued a monthly report that showed building permits across the metro were either flat or falling, continuing a trend that’s persisted all year.

During July, metro-area builders received 452 single-family permits, only 1% more than last year.

Multifamily construction has fallen much more dramatically in 2024. During July, builders pulled only enough permits to build 150 apartments and other attached housing. That was slightly more than the previous month but a 303% decline from last year at the same time.

“The demand for new homes hasn’t disappeared; it’s simply on the sidelines waiting for the right moment,” Art Pratt, board chair of Housing First Minnesota, said in a statement.

The situation is especially challenging for lower-income renters looking for income-restricted, or “affordable,” buildings that often have long waiting lists and don’t appear on the Marquette report.

Several factors are driving up demand for rentals. Wittenberg cited rising household formation rates, personal income growth and positive net migration as key drivers. He added with mortgage rates hovering near historical averages of about 7% and home prices at record highs, many would-be buyers, especially millennials, have decided to rent instead of buy.

Pending home sales in the Twin Cities fell double-digits last month, according to the latest report from the Minneapolis Area Realtors, while prices posted a modest gain. The median price of a home in the Twin Cities during June was a record $390,000.

For renters, Wittenberg said, the situation isn’t likely to improve anytime soon as developers put their plans on hold. By the end of the year, about 7,400 new units should finish, compared with only 3,800 next year.

Rental property owners across the metro said while there are fewer empty apartments across the metro, the economics of owning a rental property is still challenging. Landlords are facing higher costs of all sorts, including rising insurance premiums and property taxes.

Pete Deanovic, founding principal at Twin Cities-based Buhl Investors, recently completed the first phase of Farwell on Water, a sprawling mixed-used development overlooking Harriet Island near downtown St. Paul. Eventually, the project will have nearly 400 rentals, 64 artists’ studios in a historic building, a production studio and other workspaces.

On June 1, residents started moving into the first two new buildings — Esox House and Harbourline — which have 63 income-restricted units. Deanovic said leasing has been on pace with expectations so far, but across the company’s rental portfolio, occupancy gains in the company’s market-rate buildings have only been “measured,” he said.

And like many Twin Cities developers, the company doesn’t have anything in the pipeline.

“While occupancy gains are great, I wouldn’t characterize it as outsized,” Deanovic said. “The mood from most like our firm is tepid.”