Single-family construction is on the rise in the Twin Cities, while apartment construction is in a free-fall. – Star Tribune

Higher mortgage rates continue to have a counterintuitive impact on home building in the Twin Cities metro as construction of for-sale, single-family housing increased at a double-digit pace while apartment construction maintained its free-fall.

During June, cities issued homebuilders in the metro 542 permits to build the same number of single-family homes, a 15% increase in the past year, according to a monthly report from Housing First Minnesota, which tracks residential construction throughout most of the 13-county metro.

Apartment construction, however, plummeted. Builders and developers gained enough permits to build only 24 multifamily units, a fraction of last year's total at the same time and the monthly average.

"As homebuyers adapt to current interest rates, more and more buyers are drawn to new construction where many builders are offering incentives," said Art Pratt, a longtime Twin Cities builder and board chair of Housing First Minnesota, in a statement.

Higher mortgages rates are driving these divergent trends. They have kept sellers with much lower rates on the sidelines, constricting the number of houses put on the market and limiting options for buyers who are willing and able to buy at today's higher rates.

Mortgage rates, which are still near the historical average but are more than double the rate two years ago, have increased borrowing costs for developers and forced many developers to hit the pause button on many new apartment projects.

"Builders are adapting to the current housing market as the demand for homeownership has not wavered, even as rates and home prices have made it challenging for many," Pratt said.

In June last year, there were 548 total permits issued for a total of 566 units, according to data the Keystone Report collected. That's the least number of permitted units for any June in several years until this year.

So far this year, 3,841 total housing units gained permits, nearly 1,000 fewer than last year at this time and the fewest in several years. Only about 22% of those units were multifamily apartments and other rentals. During a typical year, about half of all total units are multifamily.

Higher borrowing costs are causing the downturn in rental construction. They come at a time when a near-record number of new apartments are completing, creating what's expected to be a temporary increase in the average vacancy rate in some parts of the metro. In much of the metro, the average vacancy rate is already below 5%, making it a landlord's market in those areas.

Through the past two years, builders have constructed nearly 20,000 new apartments, according to a second-quarter report from Marquette Advisors. Construction has tapered quickly: By the end of 2024, only 7,350 units should finish, with 3,785 following next year.

Already, the Twin Cities is quickly become a much more competitive rental market, according to a report RentCafe released Monday. The national rental search firm showed apartments in the metro become occupied within 53 days, on average, with eight renters competing for every unit.

"The complete drop off of multi-family construction is concerning," said James Vagle, CEO of Housing First Minnesota, in a statement. "Minnesota needs housing of all types."

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Single-family construction is on the rise in the Twin Cities, while apartment construction is in a free-fall. - Star Tribune