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Twin Cities Have Met New Housing Targets in Recent Years, but Growth Slowed in 2023

From 2019 to 2022, the region added more than 20,000 housing units per year, including nearly 3,800 affordable units built in 2022. But high interest rates last year have stunted that growth.

In recent years, the Twin Cities region has added thousands of new housing units to the area’s supply, increasing affordability across the region, but high interest rates stunted that growth in 2023.

A pair of reports released last week by the Federal Reserve Bank of Minneapolis and Pew’s housing policy initiative shed light on the policies and economic forces that drove increased housing supply in the Twin Cities: Primarily loosening rules like minimum parking requirements and other mandates, which encourages developers to build more.

From 2019 to 2022, the Twin Cities exceeded housing supply targets set by a coalition of business, government and nonprofit leaders, adding more than 20,000 housing units per year, according to the Minneapolis Fed’s report.

The new housing supply also included nearly 3,800 affordable units in 2022, exceeding the Metropolitan Council’s target but still falling short of the area’s need for cheap housing, according to Libby Starling, senior community development advisor at the Minneapolis Fed.

The number of new housing units added to the region’s supply is expected to drop off sharply when final numbers are calculated for 2023. From January through November 2023, 16,487 housing units were constructed in the seven-country metro area — in each of the two preceding years, that number exceeded 23,000.

The growing housing supply — including both affordable and market-rate units — have helped moderate housing prices in the Twin Cities. While housing costs have risen markedly across the country in recent years, the Twin Cities have fared better than comparable cities.

Compared to 11 similar metro areas, including Pittsburgh, Charlotte and Austin, the Twin Cities were the second-most affordable and had the second-lowest increase in average rents, according to the Minneapolis Fed.

Data from HousingLink’s Twin Cities Rental Revue show rents for advertised, vacant one-bedroom apartments in Minneapolis have increased by 4 percent since the start of 2020 compared to 2 percent in St. Paul — significantly less than inflation overall and far less than the national increase of 24 percent over the same period.

While rents for two-bedroom apartments in Minneapolis increased by around 10 percent over the past four years, St. Paul apartments of the same size only got 3 percent more expensive.

Average rents rose by 20 percent or more in recent years in comparable metro areas including Charlotte, Atlanta and Austin.

2040 Plan boosted housing supply, affordability in Minneapolis

Favorable interest rates and government policies have encouraged housing development, particularly in Minneapolis, where sweeping changes to zoning rules encouraged the construction of new apartment complexes from 2020 to 2022, according to the Pew report.

Minneapolis’ 2040 Plan — which has been embroiled in a legal back-and-forth over the city’s duty to conduct an environmental review of the comprehensive plan — spurred development of thousands of housing units despite the litigation, according to Pew researchers.

The 2040 Plan and the zoning rules it created are currently suspended while legal proceedings continue. A bill introduced last year at the state Legislature that would have ended the lawsuit did not pass.

The evidence is clear that the 2040 plan, while it was in effect, had a significant impact on housing availability and affordability in Minneapolis, said Alex Horowitz, policy director for Pew’s housing policy initiative.

On the whole, the 2040 plan streamlined the apartment construction process for developers and paved the way for lots of multifamily housing complexes in certain areas.

“When there’s a quick, simple process, the builder knows what the rules are, they don’t have to buy land and then wait for three years of meetings before they can start building, then they’re comfortable building even when rents are lower,” Horowitz said.

The 2040 Plan eliminated parking minimums, which were an added expense for developers and took up space that could be used for additional housing units. This measure, along with new zoning districts that encouraged new apartment buildings along transit corridors, were among the most impactful policies included in the 2040 plan, Horowitz said.

Some other Twin Cities municipalities, including Richfield and Bloomington, have implemented similar rules to allow denser housing. In 2023, both cities reduced the minimum lot size for homes and opened the door for the development of more duplexes.

2023 and beyond is a different story

In 2023, the disincentives for developers in the Twin Cities piled up.

Interest rates went up, making construction projects more expensive. In Minneapolis, a judge suspended the 2040 plan; then another judge upheld that suspension.

With Minneapolis forced to revert to older zoning rules, many planned developments are in limbo, the Star Tribune reported recently.

Across the river in St. Paul, a rent stabilization ordinance took effect in 2022, capping rent increases at 3 percent per year. Shortly after implementing the rule, however, the St. Paul City Council approved amendments making sweeping exceptions, among them a 20-year exemption for new construction.

Currently, around one-third of St. Paul rentals are exempt from the 3 percent cap, the Pioneer Press reported.

In 2021, Minneapolis residents voted to give the City Council the authority to regulate rents, and since then, a proposal to implement a 3 percent cap similar to St. Paul’s has not gotten the required approval by City Council to go to a citywide vote.

A new, more progressive City Council was sworn in on Jan. 1. New council president Elliott Payne said in an interview with MPR News that he supports rent stabilization.

In both cities, housing construction is dropping from the heights reached in 2021 and 2022. Final housing supply numbers for the Twin Cities in 2023 are not yet available.

The rent stabilization ordinance has spooked St. Paul developers, said Nick Erickson, director of the Housing Affordability Institute at Housing First Minnesota, a builder trade group.

But rising interest rates are an even bigger factor in stalling construction of single-family homes and apartment complexes, Erickson said.

“We’re seeing a pullback because the numbers no longer pencil out at this level of interest rates,” Erickson said.

Both Minneapolis and St. Paul have many “relatively experimental” housing ordinances in place, making it difficult to disentangle the relationships between the policies, housing supply and prices, said Dan Hylton, research manager at HousingLink, a non-profit that provides information and listings for affordable housing in the Twin Cities.

Both cities have renter protection ordinances, and Minneapolis requires landlords to accept Section 8 vouchers.

“It’s hard to know what particular piece of the puzzle is most influential,” Hylton said.

This article was first published by the Minnesota Reformer. Read the original article.
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