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The Apartment Glut That Wasn't

The Apartment Glut That Wasn't

Frustrated home buyers are keeping the overheated rental market from cooling.

Thousands of units have come online in the downtowns, Uptown, near the University of Minnesota and throughout the suburbs—and construction cranes are everywhere. There has been talk for months of an apartment bubble or glut. Despite that, it’s getting harder to find an apartment.

The Twin Cities metro area’s vacancy rate dropped from an already low 2.8 percent at the beginning of the year to 2.4 percent during the second quarter, according to a report by Marquette Advisors. A healthy apartment market has a vacancy rate around 5 percent. The low rate has given landlords more power to raise rents.

So what’s behind this confounding trend? Simple supply and demand. Blame population growth and a good economy that’s creating more jobs and changing the real estate market. “There’s been a bit of a shift in for-sale housing,” says Mary Bujold, president of Maxfield Research & Consulting. “If somebody is looking for their first home at a modest price point, they’ll find the market is quite tight.”

That means a higher percentage of households remain in the rental market, jostling for inventory with newcomers to the metro and downsizing seniors. Developers are following the money and building for those who can afford new space in prime locations.

Given the relentless pace of so-called luxury developments—Marquette Advisors counts 3,800 units expected to come online in 2017 and another 6,000 in 2018—Bujold predicts a softening in the upper end of the market in the next few years. New developments clustered in high-price areas will likely become incentive-driven to stay competitive.

But don’t expect such luck for those in the lower and middle tiers of the unsubsidized rental market; prices are going to keep rising, Bujold says. There’s simply too much demand and not nearly enough new supply.

“The only way there’s going to be a softening there is if we can deliver lower-priced housing without income restrictions to people in the middle of the market and deliver it in substantial numbers.”