Why Are So Few Condos Built in the Twin Cities?
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.
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“With current construction costs and the price of finishes, [condo] price points must fall above $1 million per unit to cover the costs.”
—Maureen Michalski, vice president of real estate development for developer Ryan Companies
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.”