Interest rates stall housing boom in Minneapolis, St. Paul
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For several years the Twin Cities has boomed with new apartment towers, office buildings, and hotels. But the metro area has quickly gone from red-hot to lukewarm.
State of play: Rising interest rates have been a major factor slowing development, making money more costly to borrow. Construction costs have also risen sharply in recent years.
Why it matters: The Twin Cities has a housing shortage, and a pullback threatens to further increase prices and rents.
Zoom in: Construction was supposed to begin last summer on a $254 million mixed-use project in Edina, but it has been delayed because investors are shying away from real estate, co-developer Ted Carlson told city officials, per the Minneapolis/St. Paul Business Journal.
- Located at 70th and France Avenue, it calls for a 24-story apartment tower, a 200,000-square-foot office building, and a new U.S. Bank branch.
What's happening: According to local real estate sources, investors aren't seeing a good enough return, even if apartment buildings are filling up with tenants.
By the numbers: Builders were issued permits to begin work on 10,638 housing units in the metro in 2023, which is down 35% compared to 2022, according to Housing First Minnesota.
Of note: Around 167,000 Minnesotans have jobs in construction, architecture, and engineering, according to state figures.
- But, the slowdown in construction has not resulted in big layoffs in the industry.
- In fact, the state added 7,100 construction jobs in 2023, according to Minnesota Department of Employment and Economic Development figures.
Between the lines: That's likely due to two factors: The industry was already woefully understaffed before the slowdown and there's still a lot of demand for other types of work.
- Minneapolis-based general contractor Kraus-Anderson Construction is seeing a slowdown in future housing projects, but it's got jobs lined up to build schools, police and fire stations, and other government work, said the firm's chief operating officer, Rich Jacobson.
What's next: There's an estimated $7.4 billion flowing to Minnesota from the 2022 federal infrastructure bill. A survey by Associated General Contractors of Minnesota found that local firms have high optimism for 2024 in the alternative energy and transportation sectors.
What we're watching: It remains to be seen if the development slowdown is a short-term blip or something that will last longer.
- If interest rates come down in 2024 — as has been signaled — things could pick up.