Housing construction is slowing down in the Twin Cities. As Streets.mn founder Bill Lindeke recently noted in MinnPost, both Minneapolis and St. Paul had steep housing permit declines in 2024.
Macroeconomic conditions are making housing development more difficult across the country, with interest rates remaining elevated, and the costs of construction materials and labor having both spiked since 2020. As Lindeke noted, however, construction in the Twin Cities has slowed more than in other peer cities. He speculated that rent control in St. Paul and the unrealized threat of rent control in Minneapolis might have scared off the investors who finance construction.
Another factor may be at play, however, especially in Minneapolis. When it comes to the housing market, the city might actually be suffering from success.
Minneapolis’ current struggle to build housing raises concern about economic development and long-term growth for the city. However, the city has built substantial amounts of housing in previous years — thanks in no small part to effective zoning reforms — and brought rents to impressively affordable levels. While these two facts are very positive for Minneapolis, they also help explain why construction is slowing down.
Furthermore, Minneapolis’ housing successes challenge two negative narratives that some might draw from Minneapolis’ declining housing construction:
- Minneapolis’ slow development reflects undesirability or economic decline in the city.
- Minneapolis’ slow development demonstrates the inability of markets to make substantial progress on housing affordability.
When we examine Minneapolis’ relative housing affordability, neither narrative seems entirely true.
Building Housing, Keeping Costs Low
Let’s first establish an important fact: Housing in Minneapolis is pretty affordable. Typical rent prices in Minneapolis are below what a household earning 60% of the area median income (i.e., about $75,000 for a family of four) could reasonably pay. Considering that this standard is commonly used to qualify housing as “affordable” for housing with subsidies and fixed rents, it’s impressive that market-wide rents — primarily housing units with no subsidies at all — are below this threshold.
In addition to low levels of rent in Minneapolis, rent growth over the past few years has been extremely modest, with rents increasing more slowly than inflation. In Lindeke’s recent column on this topic, he picked a semi-random sample of comparably sized cities to compare against the Twin Cities, showing that Minneapolis and St. Paul had seen the steepest drop off in new housing construction. I looked at rent growth in that same group of cities. As this data shows, in recent years Minneapolis and St. Paul rents have grown very slowly relative to many peer cities.
At least part of this substantial affordability is owed to major expansions in housing supply in recent years. As the data below shows, Minneapolis has done a fairly good job permitting new housing in recent years. Minneapolis’ per-capita housing permitting has been well below fast-growing cities with stronger economic growth, but the city has blown by its Midwestern peers.
In other research and reporting on medium-density infill housing, the effects of ending parking requirements, and smoother housing approval processes, I’ve examined how Minneapolis’ strong housing growth has been facilitated by effective zoning reforms.
In sum, rents have been low and steady for the Twin Cities, especially Minneapolis, while previous years saw significant expansions in housing supply (commentators at Pew and the Financial Times have made similar observations). These data help explain why the Twin Cities have seen a recent drop-off in housing construction.
At the same time that rents in Minneapolis and St. Paul have risen by less than overall inflation, input costs to residential construction have risen by 40%. With the Twin Cities already having fairly low housing costs before COVID, a huge spike in costs has made it unlikely that new housing development will pencil out.
None of this discussion about Minneapolis’s strong affordability suggests that the city’s housing problems have been solved. Minneapolis still has thousands of homeless residents, an inhumane policy failure. More generally, housing is almost entirely out of reach for residents at 30% of the area median income. These issues need to be addressed, and resolving them will require public subsidies.
At the same time, Minneapolis has low and flat rents, which is both a positive factor and a major driver of Minneapolis housing development slowdown.
Confused Narratives
Armed with this data, I don’t interpret the decline in construction as pessimistically as other onlookers. Insofar as housing costs have fallen due to increases in housing supply, these low costs represent a clear policy success for Minneapolis.
However, some might interpret a supply slowdown in Minneapolis in two negative ways. Onlookers might see the slowdown as some kind of policy or governance failure that has made the city an undesirable place to invest in. On the other hand, they might see the slowdown as disproving the potential for zoning and land use policy to make a substantial dent on housing costs. Both of these interpretations have a kernel of truth, but without the above context, they are incomplete.
One example of the “governance failure” theory of slow housing development comes from Lindeke’s recent article, in which he proposed that rent control — implemented in a very strong (now weakened) initial form in St. Paul but never in Minneapolis— was scaring off developers. Another example comes from Twin Cities Business magazine columnist Adam Platt, who wrote about a developer frustrated that Minneapolis wasn’t a profitable place to develop. Platt and the developer blamed a mix of property crime, less business-friendly “bomb-throwers” on the City Council and low rents for creating “ominous prospects for near-term housing development in Minneapolis.”
These factors need to be viewed as distinct trends with distinct interpretations. Certainly, factors causing lower housing demand in Minneapolis (such as crime or a post-COVID exodus to the suburbs) or needlessly discouraging investment (such as unresponsive government services) are bad for the city.
Ultimately, making sure that developers build housing in Minneapolis does not supersede housing affordability as a public goal. If affordable rents are a reason that developers don’t want to build in Minnesota, that’s not necessarily a problem. When we conflate positive trends and negative trends under the umbrella for construction slowing down, we’re painting an incomplete picture.
Other more market-skeptical commentators might view a development slowdown as evidence that markets are incapable of meaningfully moving the needle on housing affordability. If rents go down, the argument goes, then developers will stop building, which means that pro-housing zoning and land use reforms are limited in what they can accomplish.
This critique, too, has a kernel of truth: There exists a level of housing affordability at which developers no longer find it profitable to build, no matter the existing zoning laws, and Minneapolis seems to have reached this point. This creates a huge need for public resources to support people with low incomes.
While zoning reform can’t solve everything, it can still make a huge dent on housing affordability by bringing housing costs to manageable levels. This makes the remaining gaps far easier to close.
Although Minneapolis has reached the limits of developers’ willingness to build, it’s taken a while to get to this point. Even with rents growing below inflation since 2020, the city continued to have strong housing development in 2021 and 2022. Thus, Minneapolis’ development slowdown doesn’t seem to disprove that zoning reform can make huge progress on housing affordability.
Contrary to the dominant mood, I don’t think that recent trends in Minneapolis’ housing market spell doom and gloom. Precisely teasing out the intertwined and circular relationships among housing prices, housing development and demand for housing is difficult. But a careful accounting of recent trends suggests that reduced development in Minneapolis has a lot to do with the city’s prior successes.