In Greater Minnesota, apartment owners’ operating costs rise as small cities “scream for more housing”

Insurance, interest rates, and staffing are common challenges for rental housing owners and operators in Greater Minnesota, a region made up of 80 of the state’s 87 counties and home to 45 percent of its population.¹ That’s according to conversations with dozens of multifamily property owners there this summer. They told us that while some of their struggles felt novel, many were long-standing, related to the geography and broader long-term trends in their region.

To better understand Greater Minnesota’s housing markets, we interviewed 18 firms with a stake in the multifamily housing business. These firms collectively manage more than 10 percent of the region’s rental properties. We also held two listening sessions, which allowed us to gather input from dozens of other housing operators. This article describes what we heard in our conversations and, where possible, presents relevant quantitative data.

Long-standing challenges, intensified

Many of our interviewees said they’re dealing with long-standing problems that have been exacerbated by labor market and pricing trends over the past few months or years.

For example, firms that manage properties told us they’ve been struggling to hire maintenance and onsite property managers for years. In the past, maintenance staff and other personnel at different apartment complexes may have lived onsite. Now, to accommodate a small labor pool and save on costs, many firms employ fewer people and have them travel to service multiple properties.

The model disadvantages smaller properties in more remote locations, one interviewee explained. “There was a time where we’d manage a property with 12 units no matter where it was [because we could pay people who lived there to do maintenance and other essential work],” said a property management executive with decades of experience. “But we don’t do that anymore. If we were going to pay people to drive out to these remote areas for small properties, the fees would be too high for smaller properties to afford the services.”

When asked if staff were harder to find today compared to in the recent past, most interviewees were ambivalent. Others noted that recent wage increases for historically low-wage positions had increased competition for the slice of the workforce property managers might’ve employed in the past. Said one executive, “I’ve got bad news for you—if you’re not paying $20 an hour, you’re not going to get anyone. Walmart is paying kids out here $18 an hour now for easier work.”

Interviewees described financing concerns as persistent over the years, with some recent twists. Some of the longer-term challenges are related to the lenders willing to work in Greater Minnesota. Several interviewees noted that the largest banks rarely consider projects in cities outside of the Twin Cities region. Meanwhile, they said, smaller banks may not have personnel with the necessary background to understand the multilayered, many-sourced financing packages that make multifamily development possible.

When larger banks are willing to lend outside the Twin Cities region, they may apply different standards. “I work with regional banks that are about $1 billion in size,” one developer told us. “[I’ll pay 10 to 15 percent more for my loan] if I’m in a smaller, regional hub compared to a large metro—even if the markets’ rents are the same and vacancy rates are very low.

“So, we’re starting to pull back from smaller markets, and move toward larger markets. A city with 10,000 people might be screaming for more housing, but what can be done?” they continued. “Lenders are going to be concerned that the big employer will lay off 400 people, and the housing market will tank.”

When asked about more recent challenges, developers told us that lenders’ expectations for financing packages have changed over the past few years. Multifamily housing is financed by a mix of debt, which is typically offered by lenders like banks, and equity, which comes from developers themselves and other longer-term investors. Lenders are now looking for deals that feature less debt and more equity. If developers have to commit more of their own financial resources to provide equity for each project, the total number of projects they can pursue declines.

These challenges apply to older buildings as well as new developments. That’s because older buildings are often periodically refinanced, our interviewees explained. The same lending environment that makes it hard to finance new construction makes it difficult to borrow money to maintain or repair properties.

Higher operating costs can exacerbate these challenges. Six of our operators told us their property tax rates had increased significantly, though the reasons why varied. Some tied their higher tax bill to increases in their properties’ values, while others connected it to changes in how local jurisdictions are approaching property taxation. Regardless of the cause, higher property tax bills could reduce firms’ cash on hand to explore new projects or maintain old ones.

Increasing insurance costs also exacerbate equity-related challenges by further reducing developers’ liquidity. Higher property insurance premiums must be paid with more cash. Higher deductibles require operators to hold more of their money in reserve in case a claim is necessary.

Nearly all of our interviewees said that their property insurance premiums had increased significantly over the past two years. These premium increases came with higher deductibles, they said. In other words, they were paying more for coverage that would protect their properties less in the event of a disaster.

Insurance woes go beyond pricing

Those who shop around for policies are finding fewer interested insurers. “Several insurers don’t want to work with us,” one property owner told us. “I have to sit there for about a month now working on just insurance full-time. We used to get five bids, but it’s lower now.”

“Some insurers are limiting risk by limiting geographic exposure,” said another. “They may only underwrite one building in a market.”

Others said they felt like their insurers were taking any opportunity they could to deny them coverage. “They’ll look at a Google Earth photo of our property and see a grill on the deck, and deny us,” said one executive. “We can move the grill, you know?”

When there are only a handful of insurance options in these markets to begin with, they said, it means owners have little recourse when their policy changes for the worse.

Generally, older housing is more expensive to insure. Older plumbing, electrical systems, and roofs may be more likely to fail. A few interviewees noted that the multifamily housing stock in their area is older than the multifamily buildings in the Twin Cities region. While this is likely true in specific markets, the overall story is a bit more complicated. Census data show that about 28 percent of all rental housing properties in the 80 counties in Greater Minnesota were built prior to 1960, compared to 24 percent of the rental housing properties in the core, seven-county Twin Cities region. (See Figure 1.) However, buildings with two or more rental units in Greater Minnesota are actually newer—particularly in areas farther away from the Twin Cities. In other words, single-family rental homes in Greater Minnesota tend to be older, but other rental properties in the region tend to be relatively newer.

Some interviewees from housing and redevelopment authorities (HRAs)—public entities that own, finance, and manage rentals within specific geographic regions, in addition to managing rental assistance for lower-income renters—noted that they were able to keep their insurance costs down by purchasing insurance through a housing-authority-specific plan.

Other property owners said they were in conversations about self-insuring along with other housing operators but had yet to find a way to make this approach work. “It parks even more cash on the sideline, which is tough to do when borrowing is so expensive,” said one large operator.

The complicated nature of multifamily financing can also influence the pursuit of insurance coverage. One owner with properties in multiple markets told us they couldn’t pursue a single insurance policy for all of their developments, because it’d require coordinating the negotiation process with the many different partial owners across each individual property.

Despite obstacles, some cautious optimism

Absent innovations in property management or insurance acquisition, property owners’ options to offset increasing costs are limited. Interviewees were emphatic that they took every step possible to avoid raising rents. With costs and interest rates on the rise and few options to lower their expenses, they felt they had no other choice.

Housing providers’ ability to implement needed rent increases depends on the “tightness” of a market. When occupancy rates are high, for example, housing providers often can raise rents without worrying about finding tenants to fill their units. That’s the case in Greater Minnesota, interviewees told us, because of the region’s lack of housing inventory. “It’s fantastic to be in the housing market, where you don’t have to worry about occupancy, as opposed to managing office space,” said one executive. “Keep in mind, renters don’t have options in these markets—half as many units are coming online as we used to see.”

Real-time data on rents in Greater Minnesota are sparse. Zillow, the real estate listing platform, tracks rents in 30 Minnesota counties, seven of which are in the core Twin Cities region, and has at least one year’s worth of data for nine of the remaining 23 counties in its dataset.

Zillow’s methodology shows that rents increased from 2.5 to 3.5 percent in the core metro counties over the past year. Of the nine Greater Minnesota counties with data available, six saw an increase of 4.9 percent or more. (See Figure 2.)

Real-time data on rental vacancy rates are even more limited for Greater Minnesota. While about half of our interviewees noted that they’d had to increase the number of evictions they initiate, most still told us that occupancy rates have largely stabilized and were not a concern. “We’ve been able to raise rents significantly without any perceptible increase in vacancy rates,” said one.

These same market conditions may explain why, despite the obstacles they described, a majority of interviewees said they plan to expand their portfolios by taking on new clients or developing new projects. Demand for property management services is particularly high. “At this point we’re turning down business weekly,” said an executive at a property management firm. “There’s such a demand now, we’ve been terminating our contracts with some properties that were less desirable.”

Developers, on the other hand, told us they expected a slower construction market until lending conditions change. “Two years ago, I would’ve done three projects in the same amount of time that I’m [now] doing two,” said one developer. “There’s a $10,000 to $15,000 equity gap per unit that we have to bridge. That slows us down.”

As financing conditions have worsened, large employers have been playing a bigger financial role by underwriting workforce housing projects. According to one developer, there are communities in Greater Minnesota with growing opportunities for employment but a limited labor pool. In these places, employers and localities had been relying on hotel rooms to house their workforce. However, “that approach gets expensive for employers,” they said. “And people are doubled up [in the hotel rooms]. It isn’t great for tenants, either.” Meanwhile, tourism-dependent businesses take a hit from the lack of available hotel space.

Interviewees also told us that they’ll only take on the risks of a new development if it’s clear that the local government is on board. Otherwise, local pushback through the planning and zoning process may make a project infeasible. For example, in some cases a new apartment building may require a relatively small variance from the usual zoning rules. Neighbors or elected representatives may use this as an excuse to delay or even completely prevent a project. This can happen when a project doesn’t get the votes it needs from a public body, or winds up as the subject of a lawsuit.

Even if the developer eventually gets the approvals they need, “there’s a certain timeline that needs to be done in to keep your financing in place,” explained one interviewee. “The project can still be toast because of the delay.” Navigating delays can also add legal, consulting, and other costs to a project.

Long-standing challenges like these aside, some are seeing signs that building in Greater Minnesota may get a little easier in the future. “We just got bids three weeks ago that were under budget for the first time in four decades,” said one developer. “Part of it is that the bigger subcontractors, like in mechanical and electrical, are feeling the pinch of the Twin Cities market slowing down. A lot of these contractors have people they want to keep, so they’re offering better prices to make sure they keep them working.” Developers also noted that some of the supply-chain-related cost increases from the past few years had recently eased.

On balance, more stability expected

When asked to predict the health of the multifamily rental housing market in about six months, 11 of our interviewees expected things to be about the same, four expected things to be better, and three felt the overall situation would be worse. Many of these opinions were tied to people’s expectations about interest rates. “Interest rates are the largest factor in moving projects ahead, especially for market-rate projects,” one executive from a large development company told us. While they were generally neutral or optimistic on the future, many interviewees worried about the impact the last few years have had on perceptions about their industry. They explained that current market conditions are forcing their hand on rent increases and other decisions that they’d rather not make.

“I think there’s a negative sentiment about landlords. People think they’re gouging the market,” one property management executive told us. “Yes, we manage market-rate properties. But our clients are an amazing group of people doing the best they can to provide affordable housing out in Greater Minnesota, and when we raise rents it’s only to be able to sustain the property. The backlash makes it difficult to maintain.”

Appendix: About our interviews in Greater Minnesota

From late June to mid-August 2024, we conducted interviews with 18 housing professionals in Greater Minnesota and also held two large listening sessions. Of the 18 individuals who participated in the interviews, 16 were rental property owners or managers. The table below lists the sizes and types of the firms they represent.

Endnotes

1 The seven remaining counties in Minnesota—Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington—make up the core of the Minneapolis-St. Paul metropolitan area, also known as the Twin Cities area or region.

2 “NOAH” is an industry term used to describe housing that is affordable to low- to moderate-income households but is not income-restricted.

3 According to asset-class categorizations used across the real estate industry, Class A properties tend to be newer buildings with higher rents, while Class B properties tend to be older, with average rents for a given market.