Apartment construction tripled in the Twin Cities during May

Apartment construction more than tripled in the Twin Cities last month as rising mortgage rates slowed demand for single-family houses.

During May, builders pulled enough permits to develop 1,529 apartments and other multi-family units — a 450% increase compared with last year, according to data compiled by the Keystone Report for Housing First Minnesota.

For single-family houses, builders pulled 559 permits, 18% fewer than last year.

Though multi-family permits can vary dramatically month to month, rental construction has outpaced the single-family sector since the beginning of the year. That’s an indication, some builders say, that rising mortgage rates — and home prices — are putting a lid on demand for single-family homes.

“Homebuilders are feeling the impacts of rising interest rates as homebuyers deal with the reality of what they can afford with the new rates,” said James Julkowski, president of Housing First Minnesota.

Mortgage rates have slipped slightly over the past week, but remain more than 2 full percentage points higher than last year at this time. The average 30-year fixed-rate mortgage was 5.10% in the latest weekly survey by Freddie Mac. That was down slightly from the previous week.

Demand for rental housing in the Twin Cities softened a bit toward the beginning of the pandemic as people avoided shared living spaces and young people moved home with their parents. That was especially true in urban areas that were popular with people who wanted to live near their office and close to shops, restaurants and other urban attractions.

Demand for rental housing is now on the rise again and the average apartment vacancy rate in the Twin Cities metro during the first quarter tightened, even in downtown Minneapolis where the vacancy rate was the highest. Across the metro area, the average vacancy rate in the first quarter was just 3.6%, according to Marquette Advisors.

Those figures are emboldening for apartment developers like Brian Woolsey of Monarch, a Twin Cities commercial real estate company that was part of a team that built a 124-unit apartment building in the Loring Park neighborhood in Minneapolis.

Since opening in March, that project, called the Abbey, is now more than 70% leased, he said.

“We’re about a month ahead of our leasing schedule right now,” Woolsey said. “The pandemic is lifting and more people are going back to work and to the theater and to sporting events downtown.”

Across the country, the rising cost of buying a house has contributed to a surge in apartment construction, according to a new report from Redfin.com.

Based on the number of multi-family building permits per capita, the busiest metro areas for apartment construction during the first quarter were in Sunbelt states and a few northern metros including the Twin Cities.

That list was led by Austin, Texas, which issued 26.1 permits per 10,000 people during the first quarter, followed by Jacksonville and then Salt Lake City. The Twin Cities was No. 9 on the list with 11.1 permits per 10,000 people.

In a national comparison of rents, Redfin cited the Twin Cities as one of only three metros where rents fell during April. Compared with a national rent increase of 15%, the Twin Cities saw rents decline 2% over last year.

Redfin’s deputy chief economist, Taylor Marr, attributed the increase in apartment construction — and declines in rent — to changes in local zoning policies, including the abolition of single-family zoning in Minneapolis in 2018.

For single-family construction, the Twin Cities ranked among the lowest producers with Sunbelt states being the most active. Austin built 31.1 single-family houses per 10,000 residents compared with just seven in the Twin Cities, which was among the slowest metros for single-family construction.

“Low interest rates have long shielded homebuyers from the rising affordability issue in our state as it has become increasingly more expensive to build new homes with the steep regulatory costs in our region, the supply chain challenges and the labor shortage,” Julkowski said.