While the number of building permits filed by Minnesota developers is at an all-time high, most are for rental apartments (or single-family homes) rather than condos. While other cities add density with a mix of approaches, the Twin Cities mostly does apartments. The reason is, well, economics, and maybe some paranoia. Condos are freighted with different types of risk that local developers want nothing to do with.
There have been a few examples of condominium developments breaking ground in the last five years. In Minneapolis: Eleven on the River, featuring 118 luxury units, opened in spring 2022. At RBC Gateway, United Properties built 33 luxury condos. A development near Minnehaha Park, Portico at the Falls, added 24 units. But these numbers pale next to the thousands of apartment units opening across the metro.
Condominiums are most common in dense cities where single-family homes are prohibitively expensive. The Twin Cities was historically not such a place. Condos built in previous eras were for buyers who could afford a single-family home but wanted multi-unit living.
But with most local housing construction now multi-unit, and home prices rising aggressively, the assumption was that, as in other cities, a condo is a more econmical way to own. There’s also no landlord to be accountable to, buyers can choose the quality of fittings and/or renovate to their taste, and are not subject to rent spikes.
But the cost of condo construction locally limits the market, explains Maureen Michalski, vice president of real estate development for developer Ryan Companies. “With current construction costs and the price of finishes, [condo] price points must fall above $1 million per unit to cover the costs.”
Another disincentive is financing. Developers can finance and build an apartment building before units are leased, because lenders assume in today’s hot housing market that the building will not have a problem with cash flow. Condo financing requires sold units before lenders will finance construction, says Bill Katter, a partner at Eden Prairie-based Interstate Development who also spent two decades at United Properties.
“So, if you have, for instance, 50% of your condos sold,” Katter says, “you get a 50% loan and at 30%, a 30% loan.”
Another sticking point developers cite is a state statute that gives condo owners too easy a path to class-action lawsuits over building defects. In 2017, the law was clarified and now includes language to encourage resolution of disputes, says Mark Becker, a construction lawyer with Fabyanske, Westra, Hart & Thomson. “A lot of the claims were not successful,” he notes.
Since the clarification took effect, litigation has by and large stopped, Becker says, noting that developers can also insulate themselves with costly construction insurance. But he admits condo development remains modest. “There’s a perception that the reform from 2017 is still new and hasn’t been tested.”
Developer Michael Lander, founder of Minneapolis-based LanderGroup, says liability concerns have made it difficult for developers to find builders willing to take on a project. But he foresees a rising number of people seeking condos. Condo buyers are generally people in childless households. Thirty years ago, Lander says, 75% of households included kids, while a quarter did not, making condos less salable. Today, that ratio has flipped.
This parallels state building permit data. Until 2018, most Minnesota permits were for single-family homes. Now a majority are for multifamily. In 2023, 18,502 permits were issued for them, compared to 13,540 for single-family.
Still, for childless households that prefer ownership to rental, the apartment boom has its limits, Lander says. “When people go, ‘Oh man, I really want to live here. Can I buy it?’ The answer is no. And they [continue to] rent there because there is no place to buy.”
The open ended lawsuit liabilty is the biggest reason. It’s just not worth it for most builders.
Hmmm….I guess people don’t want to live in a hellhole!
Hi Curtis,
Did you read the article? It clearly shows demand is not the issue. If demand was an issue we wouldn’t have been building thousands of apartments.
Best,
Frank – a downtown Mpls condo resident.
Profit. That is called capitalism. Less personal money and aggravation by building apartments. Reasonable.
For a few, not necessarily the community.
Developers, like auto manufacturers and other “durable goods” manufacturers, want their bottom lines to be as black as possible (as opposed to being in the red). Just as auto makers promote and advertise entry-level vehicles to get you in the showroom so they can then sell you on various levels of upgrade, developers and builders are looking to maximize their profit, and the profit margin for low-end housing (whether for rental or purchase) is pretty thin, so the tendency is to build (refer to the adjectives in the piece above) “luxury” condos, likely because there’s more money to be made in selling high-end housing than low-end housing.
In short, they’re not in business to serve the public, which needs affordable (i.e., low-end or “starter”) housing. They’re in business to make money, and the money is in high – or higher – end housing.
Offhand, I can’t think of a reason to be especially concerned for the economic welfare of developers, since “serving the public” is far down on their list of priorities, just as serving the interests of developers ought to be far down on the list of priorities of government agencies involved in housing, whether it’s building or financing. Solving the housing issue will likely, I think, eventually involve either state or federal governments, in areas and on a scale that we’ve not seen before.
The residential real estate “market” has largely proved itself dysfunctional for those not in the upper half of the income scale. A retiree on a limited income, I could not afford to purchase the house I’m living in now if I were currently caught in that “market.” Largely as a result of Republican policies that transfer wealth from the bottom to the top of the economic pyramid, most people’s incomes have not kept pace with inflation, much less with the faster-than-inflation rise in housing costs. It’s a situation that typically calls for some sort of government intervention, with much gnashing of teeth and wailing about the unfairness of it all from the more fortunate segments of society for whom housing costs are not insurmountable obstacles.
Here’s what puzzles me about entry level housing costs. I paid $60,000 for a Mac-Groveland bungalow in 1985. With a 13% interest rate mortgage the monthly payment, including taxes, was about a third of my income at the time. Today, that house would sell for a little over $300,000 and according to Zillow, the estimated monthly cost would still be about a third of what my old job pays today.
I looked at the apartment I was renting in 1985 and compared its current rent to the change in my old job’s pay rate I got the same results. As a percentage of income, it’s about the same.
Thomas, if you’ve seen a 300% increase in your personal income since 1985 you’re the exception not the rule. For the most part until recently, most Americans have seen flat or minimal wage and salary growth over the last 3-4 decades.
Your math is a also a little dodgy. We bought the house we live in in 93 for $85k with an 8% mortgage rate. Our payments were about $650 a month. Now we have a lower interest rate but because of property taxes our payments are around $750 a month. Our house is now worth $380k, and the mortgage payment on THAT would be around $2,000 a month, that’s nowhere near the same percentage of our income which has roughly doubled during that time. Likewise the apartment we rented before we bought the house was going for $680 a month, and is now $1,500+ a month so sure, that COULD be around the same percentage of our CURRENT income, but our income is quite a bit higher than most renters. Most renters have lower incomes so they’re paying higher percentages of their income compared to our mortgage payments.
Typical response – ‘We need bigger government to solve this problem!”
Business then demands “bigger bailout/welfare payments to them because they are ‘too big to fail'”. Let them fail and find better businesses to take their place….
A missing part of the story is that developers build rental buildings to sell. It is rare that the builder is the long term owner/manager. It is preferable to sell an entire building rather than deal with selling individual condos. Most new rental buildings are sold immediately or within 18 months of construction. Multifamily rental were considered the hottest real estate asset class from 2015-2020. That market has cooled considerably due to higher interest rates and has seen the largest sales volume decline since 2009.
Gosh! The private equity guys have quit buying high-priced real estate…that’s interesting!
This article only discusses condominiums. It leaves unanswered what’s happening with townhome development. I live in a townhome and on a cul-de-sac where in the last year five of the units have been sold to young, single women.
In a backhanded way, the article does proclaim a crying, desperate need for massive government intervention to correct the total dysfunction of the housing “market.” One might have expected such intervention during or after the bank/mortgage industry-created financial meltdown and resulting foreclosure crisis to have brought about needed investigations and reforms. But no, the government can afford to bail out rich bankers even after their incompetence and venality is exposed and naked before your eyes but can’t even investigate why in the wealthiest nation in history the majority of its people cannot afford decent housing.
I don’t see what the problem is. If there were a huge unmet demand for condos, there would be condos being built.
Yup. The article even states that because MSP single family housing is relatively affordable, there’s not much demand for condos. What’s the problem?
Whenever a business model relies on immunity from lawsuits you know you have a problem with accountability. Why don’t builders think they can build solid structures without defects that will land them in lawsuits? How is this not an admission that shoddy construction is a feature of their business model? So they say: “Well it’s not the construction is the court costs” yeah but liability is a feature of many types of commerce and it’s factored into the business models. You’re basically saying that no matter how well built a condo is someone will you sue you anyways? And the only way to cope with that hazard is to build apartments that people can’t buy? OK then.
And this claim that you can’t build a condo for less than a million dollars per unit is simply daft. If can’t build a condo for less than a million dollars you’re just not trying.