The cost of renting is on the rise in the Twin Cities, and those gains are expected to accelerate in coming months.
During July, rents in the metro were up 4.2% compared with a year ago, according to Yardi, a national research firm. In an end-of-year forecast, the group said that although rent increases in the Twin Cities have been the lowest of more than 30 large metros in the nation, annual rent increases are expected to accelerate by the end of the year to nearly 5%.
"It is a serious concern," said Mary Bujold, president of Twin Cities-based Maxfield Research. "We already have an [affordable] housing crisis.'
Rents are on the rise at a time when higher mortgage rates are already putting a squeeze on the number of people who can afford to buy a home. Rising construction costs are also making it difficult for developers to build apartments that are affordable.
Bujold, who does market research and feasibility studies for developers, municipalities and others, said Yardi's 4.2% doesn't reflect the reality of what's happening in many suburbs. In those places, renters are facing double-digit rent increases.
In Woodbury, for example, Bujold is seeing 10% rent increases in newer buildings. And concessions, or inducements to rent, have completely dried up, she said.
"Stuff is just leasing up dramatically — really fast," she said. "People just aren't able to move into the for-sale market."
The total number of occupied rentals in the Twin Cities metro increased by a record 3,900 units during the first half of the year, including those in new and existing buildings, according to Marquette Advisors. That total, referred to as absorption, takes into account people who moved in and out of rental, and it beat a previous record of 3,700 units, recorded just last year.
Curt Gunsbury, a Twin Cities developer and rental property owner, said that while mortgage rates were near all-time lows, many renters were breaking their lease or not renewing because they were planning to buy a home. Even in Minneapolis, where rental demand sagged the most during the pandemic, he's seeing stronger demand and fewer concessions.
"We are definitely seeing far fewer transitions from rental to ownership among our residents," he said.
His company, Solhem, is co-developing the Fred, an $85 million apartment project on the site of what was Pentagon Park in Edina, which posted more than 12% annual rent gains — among the highest in the metro during the second quarter.
The two-phase, mixed-use project will include several hundred rentals that at what's now the gateway to Fred Richards Park. Gunsbury said construction costs have long been a serious barrier to creating more affordable rental housing and the situation is getting worse.
"Pricing is quite unpredictable, other than going up up up," he said.
The Mortenson Construction Cost Index, which tracks construction costs in the Twin Cities and other major U.S. markets, rose 11.8% to a new high during the second quarter.
"The construction market, as with many, continued to experience inflationary headwinds through the first half of the year," said Clark Taylor, vice president of estimating at Golden Valley-based Mortenson.
Those increases come at a time when homebuilding is on the decline and higher mortgage rates are stifling home sales.
At the end of July, there were just 704 houses priced from $190,000 to $250,000 on the market in the Twin Cities metro, 34% fewer than last year at this time, according to the Minneapolis Area Realtors. For all homes priced at less than $350,000, there was a double-digit decline in listings.
When mortgage rates were at record lows, it was cheaper for many families to buy a home than to rent. For many, that's no longer the case. Rates have nearly doubled since the beginning of the year and home prices are at record highs, eroding affordability — especially for entry-level buyers.
Though pending sales are down because fewer people are able to qualify for a mortgage, there are also far fewer listings. That's because so many homeowners with rock-bottom rates aren't willing to sell their house only to have to buy another house at a higher rate.
And that shortage of listings is forcing a growing number of would-be buyers to consider rentals, putting pressure on what has otherwise been a relatively stable rental market.
At the end of the second quarter, the average rent in the metro was $1,397, a 1.1% increase over the previous quarter, but 5.8% higher than a year ago, according to Marquette Advisors. Those figures don't include income-restricted housing, which is already in short supply, and senior housing.
During the second quarter, the rents increased on average 7.8% in Minneapolis and 2.9% in St. Paul. Even within the city, rent increases varied. In the southwest Minneapolis neighborhoods rents increased 8.7% while renters in downtown Minneapolis saw rents increase 5.8%. Most suburbs saw rents increase 5 to 5.8% over the past year, but there were several suburbs that saw double-digit increases.
Doug Ressler, manager of business intelligence for Yardi, said that for much of the past year rent increases in the Twin Cities have been the lowest in the nation in part because job gains, household formation and in-migration to the metro have lagged other cities.
He said that as the supply of rentals tighten, rent increases will continue to be sizable. And a hard-to-break spiral may be starting: Renters will be more likely to renew at a current apartment than risk moving to a building where the rents are higher.
"They're saying, 'If I stay here and renew I probably have better control of my costs,'" he said. "Renters are staying in place and not moving."