“The increase in vacancies in recent months relates to stagnant job growth, combined with a recent increase in the production of upscale apartment units,” says Brent Wittenberg, vice president with Minneapolis-based GVA Marquette Advisors. “Further, favorable interest rates on home mortgages have resulted in many former renters opting to purchase homes, eroding the pool of renters in the region.”

Apartment demand was strong during the 1990s, when the diverse economy added more than 250,000 jobs to the Minneapolis market and more than 30,000 jobs per year from 1998 to 2000. Meanwhile, fewer than 30,000 market rate units were added to the region, resulting in an extremely tight market situation. The vacancy rate dropped to a low of 1.1 percent in 1998 and remained below 2 percent until 2001. Landlords achieved aggressive rent increases during this time. The average rent increased by 11.1 percent from 1998 to 1999, and by 10.3 percent from 1999 to 2000.

These factors attracted local and national developers, who planned new rental projects during 1999 and 2000. “These projects were already in the pipeline during 2001, when we saw the first signs of an economic recession and suffered from the terrorist attacks of September 11, 2001,” Wittenberg says. “As a result, several new developments have come online at the same time that market demand has plummeted.”

The market has become extremely competitive, particularly in the more expensive submarkets, such as downtown Minneapolis and the western suburbs, which have seen the introduction of new product. “We’re seeing rent concessions for the first time in nearly a decade,” Wittenberg says. “In recent months, some properties have actually reduced rents.” However, the region’s average rent has remained stable as rent reductions at some properties have been offset by new apartment units being added at above average rents. Apartment owners are working hard to retain tenants and to lure renters from competitors.

Projects currently being developed are primarily upscale, mid-rise apartment communities with heated underground parking. Today’s upscale units are equipped with features such as high-speed internet access and digital cable TV systems, built-in computer workstations, gas fireplaces, 9 foot ceilings, ceramic tile, hardwood flooring, crown molding, oversized soaking tubs and walk-in closets. Amenity packages include outdoor and indoor pools, a clubhouse, party rooms, business centers, and high quality fitness centers.

One new ultra-luxury project, The Vintage at Calhoun Beach Club in southwest Minneapolis, was built in 2002 and is targeting the affluent lifestyle renter. Situated in one of the region’s most prestigious neighborhoods, this project and its neighbor, Calhoun Beach Club Apartments, offer 275 apartment units ranging from $1,100 per month to more than $7,000 per month for penthouse units. This is the region’s only such project offering the highest-quality unit features, amenities and service package, including a 24-hour concierge.

Mixed-use projects that incorporate retail with rental and for-sale housing, are being planned in both urban and suburban locations. “This phenomenon is driven by the scarcity of development sites and the necessity to build at higher densities to support rising land costs,” Wittenberg says. “Regional and city planners also advocate mixed-use development and smart growth principles.”

For example, Cincinnati-based North American Properties is constructing two mixed-use projects, one in Eden Prairie and another in Plymouth. The Watertower in Eden Prairie will consist of 228 luxury rental units, a 6,500-square-foot restaurant and 3,500 square feet of office space. The second project is a 361-unit development, Stoneleigh at the Reserve Apartments, being developed as part of a 125-acre, master planned residential community in Plymouth. Stoneleigh will also include 650 for-sale units by Rottlund Homes.

Additionally, Irving, Texas-based JPI recently opened phase I (60 units) of a new luxury rental apartment community, Jefferson @ Plymouth in Plymouth. The project will include a total of 300 units when completed in 2003.

Slosburg Company, based in Omaha, Nebraska, has 60 units under construction in Minnetonka near Ridgedale Center. A number of other national developers and investors are eying the Twin Cities market for the first time and are competing with local developers for a scarce supply of quality development sites.

Average rents at recently completed Twin Cities rental communities range from about $800 for studio units up to $2,000 in some cases. The current vacancy rate in Minneapolis — 6.6 percent — is the highest in more than 10 years. The rate is up dramatically from 4 percent in 2001 and 1.8 percent in 2000.

According to Wittenberg, people should keep an eye on Eden Prairie/Chanhassen, Plymouth, Maple Grove, and downtown Minneapolis. “These are high rent submarkets with current vacancy rates exceeding 8 percent, and additional projects are underway or planned,” he says. “However, each of these markets have strong job centers and/or have access to major highways, linking them to job centers. Therefore, the long term outlook is positive when job growth returns to the region.”

Wittenberg expects the vacancy rate to exceed 7 percent during the first half of 2003, as additional units are added. “Two thousand units were built in 2002 and a similar amount of new construction is expected for 2003,” he says. “The market will continue to be highly competitive, particularly in submarkets that are seeing the addition of new product.” With mortgage rates at 6 percent or lower, landlords can expect to lose more renters as they become home buyers.

The long-term outlook for apartment development is positive though, fueled by a diverse economy. Local economists are talking about a jobless recovery that is now occurring, with improved optimism among businesses. Businesses are remaining cautious about adding workers, and economists predict moderate job growth beginning in the second half of 2003. “However, when the economy recovers, job growth is expected to increase the demand for apartments,” Wittenberg says.

*Data presented for the 7-county metro area is based on GVA Marquette Advisors’ proprietary apartment database, composed of more than 160,000 rental units.

Brent Wittenberg is vice president of GVA Marquette Advisors in Minneapolis.

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