It’s no secret that Minneapolis is experiencing both an apartment boom and condo dearth at the same time, which begs the question, “why aren’t condos being built at the same rate as apartments?” According to many, Minnesota’s construction defect laws are to blame. The rhetoric usually claims Minnesota has unique construction defect laws for condos; it’s said that these laws make the developer liable for defects in condos for an extended period of time, and this long-tail liability increases the developer’s insurance costs beyond profitable levels for the project. But for a number of reasons, that argument misses the real story. The better explanation lies in basic principles of supply and demand.
First, Minnesota’s construction defect laws are not new. In fact, Minnesota’s statute of repose for construction defects has been on the books since 1965, which limits the length of time developers can be sued for construction defects to 10 years following “substantial completion” of the project. In addition, Minnesota’s statutory warranty has exposed developers to construction defect claims since 1977 by providing the buyer with an express cause of action against the developer. These laws haven’t changed recently and have never undergone more than minor revisions, so developers’ liability exposure hasn’t changed either. If construction defect laws were primarily to blame, we should expect the recent condo downturn to correspond with a change in Minnesota’s construction defect laws, but it doesn’t.
Second, Minnesota does not have unique construction defect laws. Nearly all states impute construction defect liability upon the developer for 5-15 years following completion of the project. At least one state (Maryland) imposes 20 years of liability upon the developer. Since other metro areas with equally harsh construction defect laws have seen condominium development in recent years, construction defect laws cannot be entirely to blame for the Twin Cities’ condo shortage.
Third, construction defect laws apply to all developments–not just condos. In particular, Minnesota gives the “vendee” (i.e. the purchaser of the apartment complex, condo, or home) a cause of action against the “vendor” (i.e. the development team). These construction defect laws do not single out condominium developers–they apply to apartments, condos, and single-family homes. Thus, if construction defect laws inhibit condominium development, they must also discourage apartment and single-family home construction. Yet, apartment and single-family home construction has boomed, which further suggests construction defect laws aren’t really inhibiting condo development.
Granted, it is also possible that owners are simply filing more construction defect lawsuits for condo projects under preexisting construction defect laws, thereby increasing insurance premiums. However, without any substantiating research, that is a hollow argument seemingly based on anecdote rather than hard data. Yet even accepting that developers are increasingly sued for construction defects in condos, that cannot be the whole story in light of the arguments outlined above. This is especially true considering that the current condo shortage is consistent with overall market trends.
Generally speaking, condos leading up to the Great Recession were built at historically high levels relative to apartments. Indeed, in 2006 nearly as many condos were built as apartments (see the graph below). But once the Great Recession hit, the housing market lurched to a stop as credit standards tightened; consequently, the country was left with a condominium surplus. It took several years for condo demand to pick up the slack, and only within the past couple of years has a condo shortage become apparent in the Twin Cities. However, the current shortage is predictable considering housing supply reacts to perceived demand, and since condominium projects are complex in nature, one should expect considerable lag time before supply catches up with demand. Nonetheless, the Twin Cities is beginning to see new condominium projects proposed or under construction. If this trend continues, the condominium shortage should disappear and most of this talk about unfair construction defect laws should go with it.