Rental vacancy rates show Fargo-Moorhead has 'a glut of apartments.' Did developers overbuild?
FARGO — Mike Bannach had a lot of options when helping his daughter find an apartment this summer in Fargo.
With a trailer load of furniture, the father of the college freshman pulled up Thursday, Aug. 1, to the U32 Apartments in north Fargo and noted the array of amenities the building offered.
“There are a lot of choices out there,” he said when asked about the availability of apartments in the metro area.
Less than six years ago, finding an apartment in the Fargo-Moorhead area wasn’t as easy, according to numbers from Fargo-based Appraisal Services Inc. Apartment vacancy rates in Fargo bottomed out in 2013 at 2.2%. Moorhead hit a 10-year low of 3.2% in June 2014.
Those rates helped trigger an apartment construction boom, but some wonder if developers overbuilt. Last fall, vacancy rates hit double digits in Fargo, and applying for permits to build new apartments has all but halted.
“I’m seeing here that we have a glut of apartments available,” Fargo City Commissioner John Strand said.
The vacancy rate for North Dakota’s largest city nearly hit 10.7% in September and 10.2% in December. Those figures are the highest rates of open apartments in the last decade, and the quarterly rate has not dropped below 8% since December 2016.
“They probably built more than were needed in a relatively short period of time,” James Gilmour, Fargo director of strategic planning and research, said of developers. “What we are seeing now is people aren’t building hardly any.”
Moorhead followed a similar trend, hitting a 10-year high of 10.8% in March 2018.
High vacancy rates make for a renters’ market, giving potential tenants more choices and possible incentives to sign leases, said Petter Eriksmoen, director of operations at Appraisal Services.
There are signs the market is turning around, he said. June’s vacancy rate dropped to about 8.5% for Fargo, 7.7% for Moorhead and 5.2% for West Fargo. If population growth in the metro area continues, the apartments likely will fill up until the rate drops to a healthy level, experts said.
“I would be guessing that developers will start building new apartments in one or two years from now,” Kilbourne Group President Mike Allmendinger said.
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The average annual vacancy rate last year was 9.4% for the metro area and 9.7% in Fargo, Eriksmoen said. The last time rates came close to that level was in 2004 and 2005, when the metro area reported around 8%, he said.
From 2002 to 2007, annual rates were 6% or higher.
“Otherwise it has been pretty steady between 4% and 6%,” he said, noting his company has tracked vacancy rates since 1993.
Appraisal Services captures about 80% to 85% of the rental market in the metro area, Eriksmoen said. Typically, a healthy market — where apartments are full enough, but there are still enough options for tenants at a fair price — has a vacancy rate of 5%, he said.
There were indications a year ago that companies had overbuilt, he said. Apartment owners offered incentives — a month of free rent, gift cards, etc. — if renters signed a lease.
“In a strong, healthy market, you would see no incentives,” he said. “Anything above 5%, especially approaching 10%, is indicative of a market where there is more supply than demand.”
The mid-2010s can give clues to why vacancy rates are so high today. North Dakota was in the middle of an oil boom, attracting workers from across the country. Fargo saw job growth, and housing was needed for workers.
Low borrowing rates also played a roll in developers deciding to build more apartments, Eriksmoen said.
“Because everybody built, the market was overbuilt,” he said. “And that’s just exactly what you would expect.”
Strand said he's worried vacancy rates are underreported. He would like to see a fuller picture, especially when rates are twice what is considered healthy.
Fargo goes through up and down cycles every several years, Gilmour said. The slowdown in apartment building is evidence the market is correcting itself, he said.
History of rentals
Since the 1990s, Fargo has had a large percentage of rental units, at least compared to other peer cities, North Dakota and the U.S.
The U.S. Census Bureau estimated there were nearly 30,000 rental units in Fargo in 2017, or 57% of all housing units in the city, according to a Forum analysis. That’s an increase from about 52% in 1990 but the same percentage reported in 2013, according to Forum archives.
Other cities in the region — Sioux Falls, S.D., Duluth, Minn., and Bismarck — reported the share of rentals between 35% and 41% in 2017, the census said. The U.S. average was 36%, while North Dakota was 37%. Minnesota and the Twin Cities were 28% and 30%, respectively.
Rental units didn’t always make up a majority of housing in Fargo. Census data shows rentals made up between 44% and 48% of Fargo’s housing units from the 1950s through the 1970s.
Rent in Fargo typically was about $200 less than the national average, according to census data from 2017.
That may be due to the continued culture of building apartments in Fargo, according to Eriksmoen. “It’s made apartment living relatively affordable,” he said.
Strand said he's concerned the share of rentals in Fargo is close to 60%. Homeownership is a value the city should evaluate, he said.
“What are the implications when we do things like allow the expansion of apartments like has happened?” he asked.
He worried some companies that can’t fill apartments may say their apartment buildings aren’t worth as much as initially thought, prompting them to ask for tax abatements in the future. Fargo not only needs more single-family homes but also a plan to get residents into ownership, he said.
“I just can’t imagine a more valuable thing to do then help people … settle into a community and invest to grow their family,” he said.
Pockets of the metro area still have high demand, including downtown Fargo, Allmendinger said. Kilbourne opened a 22-unit downtown apartment in May, and 14 units were rented as of Thursday, said Jamie Hager, vice president of asset management for the company.
“We’re about 8% vacancy overall,” he said, noting that number should drop as the fall approaches.
About 6,000 apartment units have been built in the last five years in the metro area, 500 of which were in downtown Fargo. “What we see is there are more people wanting to live in downtown Fargo,” he said.
Job growth continues in Fargo, Gilmour said. Future projects like the Fargo-Moorhead flood diversion likely will increase the need for housing, he said.
Bannach, whose daughter will attend the North Dakota State College of Science in Fargo, also noted multimillion-dollar projects announced by Sanford Health that will require workers.
“It’s been nine months since we permitted a new apartment building,” Gilmour said. “Crystal ball: Maybe in another couple of years, you’ll see a boost in building again on the south side.”