The multifamily market has remained strong throughout the pandemic, even during the worst days of COVID-19. But that doesn’t mean that this sector doesn’t face challenges. Most notably, cities across the country – including Minneapolis and St. Paul – still face major shortfalls in the amount of affordable multifamily units available to renters with lower incomes. Most of the new product that is hitting the market today? It’s higher end, with rents that are too high for many renters.
How to fix this problem? How to add more affordable units to the Twin Cities market? We recently spoke with Thomas O’Neil, vice president of market development with the Minneapolis office of Colliers Mortgage, about the demand for affordable multifamily housing in the Twin Cities and the steps that developers and government bodies can do to bring more lower-cost units to the area.
How much of a demand is there for affordable apartment units in the Twin Cities market? And how much of a shortage are there of these lower-cost units?
Thomas O’Neil: There is a very significant demand for affordable housing, and we are producing nowhere near enough affordable units each year to meet this demand. We do a lot of research at Colliers on this topic. We look at the seven-county metro area when we study the multifamily market in the Twin Cities. Each year, we should be building 4,000 to 4,500 new affordable rental units in this seven-county area. These are units priced at 60 percent of the Area Median Income or below. Unfortunately, in any given year we are actually producing 2,500 to 3,000 affordable units. We are coming up short every year.
How big is the shortfall, then, in affordable units?
O’Neil: In 2020, we produced just about 2,200 affordable units in the seven counties. And that’s for all types of population, general occupancy, families, age-restricted, seniors. All told, we are definitely underproducing each year. That causes a problem. The problem rolls forward each year. It just compounds itself.
What challenges do families face when trying to find affordable apartment units?
O’Neil: Families are struggling to find affordable housing. They end up having to live somewhere, maybe in units in which they are spending too much of their incomes on rent. Some are spending as much as 50 percent of their income on rent. Some are spending even more. Or they live in substandard units or a unit that is not suitable to their family’s needs. It might be an overcrowded living arrangement. Or they might have to live in an area of town that doesn’t work for them in terms of where schools are located or where jobs are located. They often are forced to live where they’d rather not be. Those are the downsides of having this problem continually roll forward.
What are some of the hurdles to boosting the supply of affordable apartment units in the Minneapolis/St. Paul area?
O’Neil: Funding is a big one. Building new housing is expensive. You need government sources of funds to make affordable housing work. There simply isn’t enough funding. We have gotten some relief in this legislative session in Minnesota. We’ve seen some good outcomes when it comes to affordable housing. We did get $100 million in housing infrastructure bonds approved. But it isn’t enough. We still need more funding both federally and locally. We need financial incentives to make affordable housing work for developers. That is the biggest challenge to producing more units.
There’s also NIMBYism. The ‘Not in my backyard’ opposition to affordable housing is always a big challenge. NIMBYism might not kill a project outright, but it might be successful in reducing a project’s size or unit count. And if an affordable project is reduced in size, it renders it more costly on a per-unit basis and erodes the economies of scale of a project. It becomes an inefficient use of public funds.
Governments also need to be careful to not buy into the common stereotypes of affordable housing, the stereotypes that it erodes property values, increases crime or destroys the character of neighborhoods. If they understood what affordable housing looks like today, they wouldn’t believe those stereotypes. Affordable housing is very high-quality today. It is attractive. It is often indistinguishable from market-rate developments. Government officials need to understand that affordable housing is an investment in the community. It brings new high-quality housing to a community. That is never a bad thing.
If something isn’t done to address the issue now, the problem will only be compounded. The problem is not going away on its own.
Are there any areas that are especially lacking in affordable multifamily housing?
O’Neil: Affordable housing has historically been built more in the central core of Minneapolis and St. Paul. The cities have done a good job of accommodating new affordable housing. They do their fair share. What we need is more production in the suburbs. You have about three-quarters of the population in the seven-county metro area living in the suburbs. But the supply of affordable housing has typically been much lower in these areas.
The suburbs should be producing about 3,500 affordable rental units each year. During the last decade, they have only produced just under 600 a year. Stepping up production in the suburbs would be key to addressing the affordable housing situation in the Twin Cities. That would give households more choices in what neighborhoods they could live in.
How important are financial incentives in encouraging developers to take on affordable projects?
O’Neil: Tax increment financing is a tool that can be used. Cities can also offer developers reduced fees for developing affordable housing. Density bonuses can be helpful. Those are some of the tools that cities are employing that will hopefully encourage affordable development.
You mentioned earlier how the quality of affordable housing developments has risen. Can you expand on that a bit?
O’Neil: The quality has certainly risen. Affordable housing comes with more amenities today. You might have bike storage and bike repair facilities in the buildings. They might offer playgrounds for kids. They’ll have well-appointed community spaces. Many of the affordable buildings are indistinguishable from a market-rate alternative. You won’t find golf simulators or rooftop bars. But they are very nice, comfortable buildings with a nice array of amenities.
Keeping in mind the challenges you’ve pointed out, are you seeing any upswing in the amount of new affordable rental units being added to the Twin Cities market?
O’Neil: There definitely has been an upswing in production in recent years. We are now adding more than 2,000 affordable units a year in the seven counties. This year’s legislative session was a great one for affordable housing funding. The $100 million in housing infrastructure bonds was an important piece of that. The affordable housing tax credit program here was funded for the first time. That allows people to invest in affordable housing in Minnesota and claim a credit for those contributions on their taxes.
There are definitely positive things happening in affordable housing. There is more recognition that a lack of affordable housing is a widespread economic problem, one that impacts the entire country. There has been increased funding put forward. We are also seeing more development in the suburbs. There is still a shortfall, but an increasing percentage of affordable units are being built in the suburbs.
But we still have a long way to go to get in front of this problem. We are still chasing it. The end to this problem is still a far way off.