Would-be buyers are now renting
For the first time since the housing boom, rental property owners are seeing relief from rising vacancy rates and stagnant rent prices.
Instead, growing numbers of prospective home buyers are choosing to rent, in some cases because they have been priced out of the market or are worried about getting into a market that doesn't offer a guaranteed profit.
And that is causing vacancy rates to fall, rent prices to rise and apartment building construction on a scale that hasn't been seen in years. Although it is one of the strongest buyer's markets in more than in a decade, sales haven't kept pace with rising inventory. That means the housing market no longer has the momentum to steal from the rental market.
The total number of closed home sales in the Twin Cities metro area last year dropped 16.3 percent, according to the Minneapolis Area Association of Realtors.
"I think people are afraid right now," said Tracy Bolton, marketing director for Steven Scott Management in St. Louis Park. "I think there's a stigma attached to what's happening in the housing market right now and prices are still very expensive."
The housing market hasn't collapsed the way some feared it might, but trepidation about being able to sell in the event of a job transfer, marriage or other unforeseen circumstances is making buyers more skittish. And that caused occupancy rates and rents to rise modestly last year, according to GVA Marquette Advisors in Minneapolis.
Effective rents, after subtracting concessions such as free months, increased 3 percent in 2006, overall vacancy rates fell to 4.7 percent last year from 6.1 percent in 2005 and average rent prices rose from $851 in 2005 to $871 last year, according to GVA's year-end market report.
GVA's vice president, Brent Wittenberg, attributes some of the shift in the rental market to an improving economy that includes low unemployment and strong wage growth.
"More people are making at least a short-term commitment to renting," he said.
Those increases vary depending on the market. Overall vacancy rates at Steven Scott, for example, fell 1 to 2 percent across the board last year, while rents remained flat. And Bolton expects concessions to be virtually nonexistent by the end of next year.
Steven Scott's president, Steve Schachtman, said the company is finally regaining some ground after years of offering healthy incentives and even some rent reductions at a time when he was also dealing with rising energy and maintenance costs.
"You're starting to see the person who wanted to buy a house start adding up the cost ... the mortgage payments, taxes and upkeep, and they're finding out that because of the uncertainties out there, they want to look at apartments," he said.
More units coming
A more dramatic sign of this shift will be seen on the skyline. In Minneapolis at least three apartment projects are being built and more are planned.
Although not as big as the condo building boom that swept the metro area during the past six years, it's going to be the most construction the rental market has seen in several years.
That short list includes two projects led by Michigan-based Village Green Companies, which manages more than 31,000 units nationwide. They are collaborating with a local company in the construction of a 158-unit luxury apartment building on Lake Calhoun. And on Loring Park the company is building an addition to the Eitel Hospital building, which is undergoing a historic renovation, that will include 213 upscale apartments with 10- to 20-foot ceilings and a Zen garden on the roof. But Village Green's chairman and CEO, Jonathan Holtzman, said he's bullish on the prospects for the rental market in Minneapolis in large part because of the city's new cultural attractions and burgeoning downtown neighborhoods.
A few miles away in south Minneapolis, the father-son team of Paul and Kevin Klodt is building 229 apartments in a $30 million, five-story complex of buildings in a once-industrial area near the Hiawatha Light Rail Transit system's 46th Street Station.
And Chip Johnson, founder of Minneapolis-based Turnstone Group, is focusing less on condo conversions and more on multi-family projects. He is planning to build a 109-unit luxury apartment building in Minneapolis' Uptown neighborhood.
"We like to evolve with the trends and the condos were a major trend for the last four years," Johnson said. "We don't want to follow that [trend] down, we'd rather follow multi-family up."
Litzinger, who also works at a Steven Scott property in Eagan, said it's easy to gauge the trend. Renters are no longer opting for the buy-build clauses that were so popular over the past few years. By paying an additional $20 a month, renters could break their lease with two months' notice after a full year of renting if they decided they wanted to buy a house.
"Starting last summer, they stopped doing it," she said. "People don't know what to expect from the market, I hear it every day."
Instead, growing numbers of prospective home buyers are choosing to rent, in some cases because they have been priced out of the market or are worried about getting into a market that doesn't offer a guaranteed profit.
And that is causing vacancy rates to fall, rent prices to rise and apartment building construction on a scale that hasn't been seen in years. Although it is one of the strongest buyer's markets in more than in a decade, sales haven't kept pace with rising inventory. That means the housing market no longer has the momentum to steal from the rental market.
The total number of closed home sales in the Twin Cities metro area last year dropped 16.3 percent, according to the Minneapolis Area Association of Realtors.
"I think people are afraid right now," said Tracy Bolton, marketing director for Steven Scott Management in St. Louis Park. "I think there's a stigma attached to what's happening in the housing market right now and prices are still very expensive."
The housing market hasn't collapsed the way some feared it might, but trepidation about being able to sell in the event of a job transfer, marriage or other unforeseen circumstances is making buyers more skittish. And that caused occupancy rates and rents to rise modestly last year, according to GVA Marquette Advisors in Minneapolis.
Effective rents, after subtracting concessions such as free months, increased 3 percent in 2006, overall vacancy rates fell to 4.7 percent last year from 6.1 percent in 2005 and average rent prices rose from $851 in 2005 to $871 last year, according to GVA's year-end market report.
GVA's vice president, Brent Wittenberg, attributes some of the shift in the rental market to an improving economy that includes low unemployment and strong wage growth.
"More people are making at least a short-term commitment to renting," he said.
Those increases vary depending on the market. Overall vacancy rates at Steven Scott, for example, fell 1 to 2 percent across the board last year, while rents remained flat. And Bolton expects concessions to be virtually nonexistent by the end of next year.
Steven Scott's president, Steve Schachtman, said the company is finally regaining some ground after years of offering healthy incentives and even some rent reductions at a time when he was also dealing with rising energy and maintenance costs.
"You're starting to see the person who wanted to buy a house start adding up the cost ... the mortgage payments, taxes and upkeep, and they're finding out that because of the uncertainties out there, they want to look at apartments," he said.
More units coming
A more dramatic sign of this shift will be seen on the skyline. In Minneapolis at least three apartment projects are being built and more are planned.
Although not as big as the condo building boom that swept the metro area during the past six years, it's going to be the most construction the rental market has seen in several years.
That short list includes two projects led by Michigan-based Village Green Companies, which manages more than 31,000 units nationwide. They are collaborating with a local company in the construction of a 158-unit luxury apartment building on Lake Calhoun. And on Loring Park the company is building an addition to the Eitel Hospital building, which is undergoing a historic renovation, that will include 213 upscale apartments with 10- to 20-foot ceilings and a Zen garden on the roof. But Village Green's chairman and CEO, Jonathan Holtzman, said he's bullish on the prospects for the rental market in Minneapolis in large part because of the city's new cultural attractions and burgeoning downtown neighborhoods.
A few miles away in south Minneapolis, the father-son team of Paul and Kevin Klodt is building 229 apartments in a $30 million, five-story complex of buildings in a once-industrial area near the Hiawatha Light Rail Transit system's 46th Street Station.
And Chip Johnson, founder of Minneapolis-based Turnstone Group, is focusing less on condo conversions and more on multi-family projects. He is planning to build a 109-unit luxury apartment building in Minneapolis' Uptown neighborhood.
"We like to evolve with the trends and the condos were a major trend for the last four years," Johnson said. "We don't want to follow that [trend] down, we'd rather follow multi-family up."
Litzinger, who also works at a Steven Scott property in Eagan, said it's easy to gauge the trend. Renters are no longer opting for the buy-build clauses that were so popular over the past few years. By paying an additional $20 a month, renters could break their lease with two months' notice after a full year of renting if they decided they wanted to buy a house.
"Starting last summer, they stopped doing it," she said. "People don't know what to expect from the market, I hear it every day."
By Jim Buchta / StarTribune
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