As new apartments in downtown Minneapolis dry up, rent increases appear likely

Downtown Minneapolis has long been the most spendy spot in the metro to rent an apartment. But in recent years, with more empty apartments than willing renters, it was also one of the best places to score perks like a couple of months of free rent or a parking discount.

That’s about to change.

Demand for rentals is on the rise, but developers aren’t building any more of them.

“The stage is set for owners to become more aggressive with rent increases,” said Brent Wittenberg, vice president of Marquette Advisors, a firm that tracks the rental market in the Twin Cities.

Already, prices are on the rise. The average rent in the Central Business District and surrounding neighborhoods during the first quarter was $2,170, a nearly 8% increase over last year. That’s nearly $200 more than a year ago and more than $600 higher than the metro-area average, according to Marquette Advisors.

High rents are nothing new for downtown, where thousands of luxury apartments decked out with resort-style amenities that appeal to young professionals and downsizing baby boomers have been built over the past decade, making the area the epicenter of a metro-area apartment boom.

During the five years leading up to the pandemic, developers built nearly 4,000 apartments in several downtown neighborhoods, including the North Loop and Central Business District.

This year, despite declining vacancies, the last three towers are leasing up and no new buildings are under construction. Construction is still happening in the suburbs, but it’s dwindling as higher mortgage rates, and rising financing and construction costs make it difficult to build new apartments.

Across the metro, the average multifamily residential building vacancy rate is just under 5%, a level that’s considered evenly balanced between supply and demand. Still, in areas where new buildings are filling up and construction is underway, free rent and other concessions remain on offer.

In downtown Minneapolis, rent concessions are still available, but they’re not as common — or generous — as they were a year ago because demand has been strong and vacancies are falling. Buildings that offered two months’ free rent a year ago might now be offering only a free month on select units, said Tim Carson, leasing director for DRG, a North Loop-based real estate brokerage that also leases downtown condos and apartments.

That shift is a sign of better times ahead for property managers. Across several downtown neighborhoods, renters signed leases on more than 1,000 additional apartments in new and existing buildings last year, exceeding the 10-year average.

Even if leasing slows a bit this year, Wittenberg expects the downtown vacancy rate to fall to 5%, a level not seen downtown in several years.

Carson said the rental landscape started shifting in mid-February.

“It suddenly went from struggling to fill winter vacancies to having more than enough renters to fill those units,” he said. “I went from having three vacancies available in one condo building to having none. And the ones coming [available] are getting rented up before becoming vacant.”

So far, the North Loop is leading the downtown apartment recovery in part because it’s a magnet for young professionals like Isabelle Kraemer, who lives in North Dakota but is interviewing for pharmaceutical or medical sales jobs in the Twin Cities.

She’s been exploring rentals in the Twin Cities for several months online, but has zeroed in on the North Loop and adjacent neighborhoods because she’ll be close to shops and restaurants.

Though the North Loop is more expensive than other areas, she’s willing to pay the price.

“You won’t find anything incredibly reasonable in that location, but it’s worth it for me,” she said.

Though rents are more affordable in the suburbs, she doesn’t want to waste time and money commuting to all the things she loves. Still, she said she’s noticed shifts in the downtown market: Some buildings have no new empty units, and only about a third of the buildings she’s considering offer rent concessions.

Other parts of downtown, including the Central Business District and Elliot Park, aren’t recovering as quickly, but the fundamentals are changing. That’s true in the suburbs as well, where apartment construction is far more robust, but still dwindling.

“With the slow-down in apartment deliveries, we’re already under-supplied across many Twin Cities submarkets,” said Wittenberg, noting that across the metro the average vacancy rate is already below that 5% threshold and likely to decline.

“Despite this, owners remain somewhat cautious as it relates to rents,” Wittenberg said.

He said many building owners are focused on retaining current renters, so some might be less inclined to pass along aggressive rent increases.

Nationwide, the average multifamily building vacancy rate across the country was 8.2% during the first quarter, according to a new analysis of U.S. Census Bureau data by Redfin, an online real estate company. That was the highest level since the start of 2021.

Like the Marquette data, those figures only include market-rate rentals in larger buildings. Income-restricted rentals are in extremely high demand and often having waiting lists.

Redfin says nearly 125,000 new apartments were completed nationwide in the fourth quarter — the second highest number on record — following an all-time high during the previous quarter.

Stefanie Sokup, director of marketing for Twin Cities-based Schafer Richardson, said she and other developers can feel the shift, despite broader economic uncertainty.

“I do feel better about the supply in the market and the rent levels we were able to achieve on renewals and new leases,” Sokup said. “I think it is just going to keep getting better with the lack of construction starts in the last 12 months due to interest rates.”

The Twin Cities-based company has several market-rate and income-restricted buildings in the North Loop, where demand has been strongest.

“Market conditions there are great,” she said. “It’s a thriving area with no new construction so it is really starting to stabilize.”

Luke McDonough, a DRG leasing specialist, said the decline in construction means he’ll soon have to shift from leasing apartments to selling homes.

“Some buildings are having struggles stabilizing,” he said. “It’s definitely neighborhood-focused.”

That’s not been the case at North Loop Green, a mixed-use development that’s nearly fully occupied after being completed a little more than a year ago.

He said demand is fueled by people who work downtown, including transplants from San Diego, Chicago and other cities.

“The younger crowd still wants to live in the downtown area,” said McDonough. “They’re drawn to bars, restaurants and activities.”

With no new buildings in the pipeline, he’s spreading the word that higher rents are on the way.

In a recent video he’s sharing on social media, he warns that rent increases are on the way.

“We’re not going to see any new buildings for at least 2.5 years,” he said, so if we still have the people, the owners are going to say, ‘We can pump up the rents a little.’”