Fed report identifies housing challenges in Greater Minnesota

Operating costs are creating challenges for apartment owners and developers in Greater Minnesota, where housing needs are especially acute, according to a report by the Federal Reserve Bank of Minneapolis.

Insurance costs, interest rates and staffing shortages were identified as three roadblocks for rental housing owners and operators in the region, according to the report, which was compiled through conversations with property owners and managers. 

The Federal Reserve Bank last summer interviewed 18 organizations with connections to the multifamily housing business. It found that one of the biggest differences between Greater Minnesota counties and more metropolitan areas was in rent increases, said Ben Horowitz, an author of the report and senior policy analyst at the Federal Reserve Bank of Minneapolis. 

Developers also said in the interviews that construction has taken longer recently than in past years for a variety of reasons, including difficulty getting lenders interested in projects. 

“There was definitely a sense of frustration from some who worked in both Greater Minnesota and the Twin Cities, that it often felt harder to find lenders who truly understood economic conditions in Greater Minnesota and some of the banks that are more local, smaller regional banks there might not have the… expertise to understand the really complicated capital stacks that can get built for new housing projects,” Horowitz said. 

Respondents expressed difficulty finding insurance because of older housing stock. This isn’t necessarily reflective of the entire region because data shows that housing stock in Greater Minnesota is newer than that of the Twin Cities, Horowitz added. 

Sixteen of the respondents were property owners/managers, while another respondent was from a foundation that works on housing affordability and another was a builder who works with developers. 

The Federal Reserve Bank of Minneapolis has done a similar report on challenges facing Twin Cities apartment owners. Both reports are part of the Community Development and Engagement department, which Horowitz said has an interest in tracking economic impacts on low- and moderate-income households. 

“We wanted to check in with housing operators outside of the Twin Cities metro area to see how market conditions have been treating them the past few years and especially in the past couple of months, and how they’re thinking about the future because it helps us make sure that the research that we’re doing is relevant to what’s facing low and moderate-income households and communities,” Horowitz said. 

Fed researchers also asked interviewees about their predictions for the health of the multifamily rental housing market in about six months. Eleven interviewees expected things would be the same, four thought it would be better and three felt the situation would be worse. 

Larger rent increases

Meanwhile, rent increases from July 2023 to July 2024 were higher in several Greater Minnesota counties compared with those in the Twin Cities, according to a calculation based on Zillow rent indexes. 

Rents increased from 2.5% to 3.5% in the core metro counties over the past year, while of the nine Greater Minnesota counties with data available on Zillow, six saw an increase of 4.9% or more, according to the report. The highest increases were roughly 14% in Mower and Winona counties. 

Horowitz thinks this could be because of supply and demand resulting in the market favoring property owners in Greater Minnesota more than it does in the metro. 

“That’s kind of the first thing an economist’s brain goes towards,” he said. “There’s just fewer options for people to rent. So if people have fewer options to choose from on the rental market, you would expect the owners of those properties to be able to raise prices to offset the costs that they’re seeing.”

Ava Kian

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