As renters gobble up new apartments in the Twin Cities, developers can’t keep up

As housing construction slows, renters in the Twin Cities are signing leases for apartments faster than developers can build them, leaving apartment buyers in dire straits and driving up rents.

In the first half of the year, renters signed for 4,800 apartments, the most in decades, while builders delivered just 4,533 apartments during the same period, according to a second-quarter report from Marquette Advisors.

In the rental market, there is a balance between supply and demand when the vacancy rate is 5%, but at the end of June the average vacancy rate in the metropolitan region fell to 3.9%, the report said.

Strong demand means higher rents, which rose an average of 2.9% year over year. Those gains varied widely across cities, with the biggest increase (4.2%) in the southeast suburbs. Rents fell slightly in the southwest metro, where several new apartment projects have recently opened. Rents were essentially flat in both Minneapolis and St. Paul, which have seen robust construction activity in recent years.

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

But the metro is experiencing a shortage of housing of all types, sending home prices to record highs. Yet developers are pulling back as higher mortgage rates and a restrictive lending environment have made it difficult to finance new projects, including those for rent and sale.

“Financial viability is the biggest challenge for most people in the current interest rate environment,” Wittenberg said.

Earlier this week, Housing First Minnesota, a trade association for home builders, released a monthly report showing that the number of building permits in the metro area remained flat or declined, a trend that has continued throughout the year.

In July, builders in metropolitan areas received 452 permits for single-family homes, just 1% more than last year.

Multifamily construction has fallen much more dramatically in 2024. In July, builders only drew enough permits to build 150 apartments and other attached homes, up slightly from the previous month but down 303% from the same time last year.

“The demand for new housing hasn’t gone away; it’s just sitting on the sidelines, waiting for the right time,” said Art Pratt, chairman of the Housing First Minnesota board of directors, in a statement.

The situation is especially difficult for low-income tenants seeking affordable housing on a limited income. These buildings often have long waiting lists and are not included in the Marquette report.

Several factors are driving demand for rental properties. Wittenberg cited rising household rates, personal income growth and positive net migration as key factors. He added that with mortgage rates hovering around historical averages of around 7% and home prices at record highs, many potential buyers, particularly Millennials, have decided to rent rather than buy.

Home sales in the Twin Cities fell by double digits last month, according to the latest report from Minneapolis Area Realtors, while prices rose modestly. The median price of a Twin Cities home in June was a record $390,000.

For renters, Wittenberg said, the situation is unlikely to improve anytime soon as developers put their plans on hold. About 7,400 new units are expected to be completed by the end of the year, compared to just 3,800 next year.

Landlords in the metro said that while there are fewer empty apartments in the metro, the economics of owning a rental property are still challenging. Landlords are faced with a variety of higher costs, including rising insurance premiums and property taxes.

Pete Deanovic, founder of Twin Cities-based Buhl Investors, recently completed the first phase of Farwell on Water, a sprawling mixed-use development overlooking Harriet Island near downtown St. Paul. The project will eventually have nearly 400 rental units, 64 artist studios in a historic building, a production studio and other workspaces.

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

And like many developers in the Twin Cities, the company has nothing in the pipeline yet.

“While the occupancy gains are great, I wouldn’t characterize them as excessive,” Deanovic said. “The mood at most companies like us is lukewarm.”