Fargo apartment construction expected to slow down following big 2020
Nearly 1,200 apartment units opened or were under construction in 2020. That number should fall sharply in 2021, though, Fargo city officials project.
FARGO — 2020 proved to be a prosperous year in terms of new apartment construction in Fargo, a report from real estate valuation and analysis firm Appraisal Services found.
That’s despite the economic downturn spurred by COVID-19 and a pandemic-driven spike in commodity prices for construction materials such as lumber and steel .
One hundred and ninety-five units in multi-family buildings were completed from December 2019 to December 2020, with an additional 991 units under construction. It adds up to nearly 1,200 new units either opened or under construction in the city during a year marred by the pandemic. The city permitted 899 units in multi-family buildings in 2020.
Don’t expect to see nearly as many units open or commence construction in 2021, however, Jim Gilmour , the city’s director of strategic planning and research, told The Forum.
Construction firms are responding to the vacancy rate, which is the percentage of units sitting unoccupied in the city. The vacancy rate and new construction are inversely related, Gilmour explained, meaning when the vacancy rate is high, construction slows. When the vacancy rate is low, construction jumps.
In 2019, when the vacancy rate was high, the city permitted 172 apartment units. In 2020, meanwhile, the vacancy rate was low, resulting in the nearly 900 units permitted.
Thus far in 2021, the city has permitted 152 apartment units with only one project pending in the construction review phase, indicating a construction slow-down is to be expected in the short-term.
The trend over the past three years has proven to be a continuation of prior years , Gilmour said. “(The vacancy rate) got to be fairly low by around 2015 and 2016, and by that I mean somewhere around 6%,” he said.
Following a subsequent spike in construction, the vacancy rate shot up to nearly 10% . “What happened was, when the vacancy rate was low, we saw a large number of apartments being built,” Gilmour said. “Then, as the vacancy rate went up, that number dropped. It’s become the opposite of each other.”
Over the past 25 years, the city has seen higher peaks and valleys in terms of its vacancy rate, leading to ups and downs in apartment construction. “It’s kind of a roller coaster on the construction side,” Gilmour continued. “It seems like the market can absorb so many apartments in a year.”
As a result, Gilmour and city planners can predict when the next construction rush will come. “Every time the vacancy rate drops down to below 5%, you know construction is going to jump and if it’s higher, you know construction is going to drop,” he said.
Market variables at play
Builders evaluate other factors when plotting new apartments as well. Expected job growth and interest rates all factor into the calculus. “When they’re building, they’re thinking about what things are going to be like for the next 20 years, not just necessarily the next year,” Gilmour said.
Market conditions, though, can alter significantly during the roughly two-year time period between initial permitting for an apartment and welcoming tenants. A builder could begin a project when the vacancy rate is low and ultimately find the vacancy rate has risen by the time it’s completed.
With the national vacancy rate hovering around 6%, Gilmour said the ideal vacancy rate for Fargo would be between 5% and 6%, which is good for both tenants and landlords. “Five to six percent is sort of that range where people trying to rent apartments will have adequate choices and not have to pay really high prices,” he said.
When the rate falls too low, renters will have a more difficult time finding an apartment and may see a higher price tag. When the rate is too high, landlords have difficulty filling units and as a result offer various incentives to attract tenants. With a high vacancy rate, the city also becomes concerned units might not be maintained.
Maintaining a steady vacancy rate is a difficult task, however. “Let’s say you need 600 apartments. It’s not like the builders all get together and decide which ones are going to get built, so there are 12 different people that each build 100 units,” Gilmour said. “Then the vacancy rate is up to 9% and everybody stops.”
"It’s always been the philosophy to let the private market build what it thinks is needed...If someone wants to build another taco shop, we don’t worry about how many burritos there are in town."
— Jim Gilmour
In spite of a fluctuating vacancy rate, rental costs have held steady. “What’s been fairly consistent is that Fargo has pretty competitive rental markets compared to other metro areas,” he said. Because of relatively low land costs and few permitting issues, Fargo’s vacancy rate seldom falls extremely low, as Gilmour said is the case in other metro areas.
The city also takes a fairly laissez faire approach to permitting new projects and doesn’t set a quota or objective for new units. “It’s always been the philosophy to let the private market build what it thinks is needed,” Gilmour said, rather than limiting construction, which could create a shortage.
Gilmour likened it to building a new restaurant. “If someone wants to build another taco shop, we don’t worry about how many burritos there are in town,” he analogized.
Breaking it down
Because Fargo’s rental market is segmented between various user groups, Gilmour said a city-wide analysis is less useful than analyzing vacancy rates by neighborhood.
As enrollment at North Dakota State University rose, interest in building apartments near campus climbed. As a result, projects such as the on-campus University Village renovation, U32, The Bridges and the expanded Newman Center sprang up.
NDSU’s enrollment has slumped in recent years, causing developers to pump the brakes on building near campus. “You had a case where demand dropped and supply increased, so now there hasn’t been as much interest in building by campus,” Gilmour said.
It’s no surprise then that north Fargo, where NDSU is located, has posted an average annual vacancy rate north of 10% in each of the past three years, Appraisal Services found.
On the other hand, downtown Fargo has remained popular among tenants and builders. While its average annual vacancy rate for 2020 was higher than most other areas of the city, downtown’s vacancy rate dropped in each quarter over the past year, down to 5.8% in the fourth quarter. Just over 300 units are currently under construction downtown, the report said, and Gilmour added units downtown are filling up.
South Fargo, which Appraisal Services defines as the area south of Main Avenue and Second Avenue South and divides into five neighborhoods, reported lower vacancy rates, ranging from 5.4% to 7.5% for the year.
As a growing number of Baby Boomers reach retirement age, the city is also experiencing an increase in demand for senior housing.
As work continues to move all residents out of the Lashkowitz High Rise, Jill Elliott, the executive director of the Fargo Housing and Redevelopment Authority, said there was some concern with regard to releasing 247 tenants into the market at one time.
“We had worried about that, putting so many one-bedroom folks into the market at one time, but it’s worked really well,” Elliott said. “So far they’ve been able to find units.”
The high rise should be down to its last 85 tenants this month, Elliott reported. Before COVID-19, the plan was to have everyone moved out by September, but the timeline has since been pushed back to the end of the year. “We feel pretty good about it,” Elliott said when asked if Fargo Housing will meet the goal.
Using housing assistance vouchers from the Department of Housing and Urban Development, former Lashkowitz residents can move anywhere in the Fargo-Moorhead area or “port out” and move anywhere else in the country, Elliott explained.
Built in 1971, units in the high rise checked in at 305-square-feet, “really tiny” for today’s market, Elliott noted. The units also lacked amenities common in new buildings such as dishwashers, carpeting and garages. Using the HUD vouchers, new amenities come at no additional cost to tenants, who pay 30% of their income in rent. “They’re pretty excited because our high rise was built in the 70s,” Elliott said.
Gilmour forecasted a slow down in the near-term for apartment construction in Fargo due to the city’s currently-low vacancy rate. He also noted that 2020 saw an uptick in single-family house construction, which may be due to the COVID-19 pandemic forcing people to reconsider their living situations.
Even if residents are flocking to houses, apartments will continue to spring up over the next decade. The planned Amazon Distribution Center and F-M Diversion are projected to be major drivers of job growth, which will increase housing demand.
“If job growth continues, the apartment growth will continue,” Gilmour said. “It’s all tied to that.”