Why developers have stopped building apartments
Why it matters: The metro area is already undersupplied on housing. A staggering decline in multifamily building could drive up prices in the years to come.
By the numbers: After peaking at 15,500 in 2022, permits issued to begin apartment construction in the metro fell to 5,000 last year and are on an even slower pace this year, according to preliminary data from the U.S. Department of Housing and Urban Development.
Zoom in: Sherman Associates has been one of the most prolific local developers in recent years, building hundreds of units in Minneapolis and beyond.
The company doesn't have a single project under construction right now, and as CEO Chris Sherman told Axios, his Minneapolis firm can't make it work without public subsidies.
State of play: While there can be some outliers, the typical cost to build a midrise apartment building (think four to five stories) has reached $320,000-$340,000 a unit, Sherman said.
Meanwhile, the average price paid for Class A apartment buildings was $223,400 per unit last quarter, said Heidi Addo, a broker who sells multifamily communities for Michel Commercial Real Estate.
This massive gap is a nonstarter for most developers, especially merchant builders, who develop apartment communities, fill them up with renters and then sell.
The big picture: The three main reasons for the slowdown:
Construction costs have risen nearly 40% since 2020, according to general contractor Mortenson's Construction Cost Index for Minneapolis.
Interest rates have risen dramatically since 2022, and there's a correlation between them and what price sellers can get for apartments. When interest rates were historically low in 2022, the average sale price of apartments peaked at $285,000 per unit, according to a Michel Commercial Real Estate report.
Rents have not kept up with rising costs. Asking rents in the metro increased only 1.4% year over year in March, to an average of $1,543 per unit, according to the report.
Friction point: Sherman said apartment sales prices will have to eclipse $400,000 per unit before his firm begins building again, with the exception being projects that receive public subsidies, like the one they're working on in St. Louis Park.
"The numbers are just upside down — and not by a little, but a lot," Sherman said.
What we're watching: Both Addo and Sherman believe rent increases are coming. Addo is already tracking major hikes in areas of the metro where few units have been delivered in recent years, particularly the northern suburbs.
Sherman said the sweet deals renters have been getting — like free months of rent for new leases — will be drying up soon.
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Havalah Hopkins rarely says no to the chain restaurant catering gigs that send her out to Seattle-area events — from church potlucks to office lunches and graduation parties. The delivery fees and tips she earns on top of $18 an hour mean it's better than minimum-wage shift work, even though it's not consistent. It helps her afford the government-subsidized apartment she and her 14-year-old autistic son have lived in for three years, though it's still tough to make ends meet. 'It's a cycle of feeling defeated and depleted, no matter how much energy and effort and tenacity you have towards surviving,' Hopkins said. Still, the 33-year-old single mother is grateful she has stable housing — experts estimate just 1 in 4 low-income households eligible for U.S. Department of Housing and Urban Development rental assistance get the benefits. And now Hopkins is at risk of losing her home, as federal officials move to restrict HUD policy. 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'Instead, it creates chaos, financial uncertainty and pushes these families into more severe trade-offs.' Time limits could imperil Aaliyah Barnes' longtime dream of graduating college and becoming a nurse, finding a job and a home she can afford. The 28-year-old single mom in Louisville, Kentucky, this year joined Family Scholar House, which provides counseling and support for people pursuing an education — and, to Barnes' relief, housing. Her apartment is paid for by a Section 8 voucher. In March, Barnes moved in and her 3-year-old son, Aarmoni, finally got his own room, where she set up a learning wall. Previously, she had struggled to afford housing on her wages at a call center — and living with her mom, two sisters and their kids in a cramped house was an environment ridden with arguments. The stable future she's building could disappear, though, if she's forced out in two years when her schooling is expected to take three years. 'I'd be so close, but so far away,' Barnes said. Ho and Kramon write for the Associated Press.
