In early December, sales agent Cotty Lowry helped a client sell her four-bedroom, two-and-a-half–bath 1920s-era colonial revival–style home, which sits on nearly half an acre in one of Minneapolis’ most coveted neighborhoods. The 2,378-square-foot home sold for 95% of its asking price, at just over $1 million. But the buyer’s intent is not to live in the home but to tear it down and replace it with a high-end two- or three-unit complex. Before the beginning of the year, such a proposal would have been impossible on that lot—and potentially illegal—under the city’s long-standing single-family zoning restrictions.
But in a bold move aimed at increasing housing options in a city struggling with extremely tight inventory, on Jan. 1, Minneapolis became the first major city in the country to effectively ban single-family zoning. The new ordinance permits construction of duplexes and triplexes on lots traditionally zoned for only one home. However, the projects must meet lot size, structural height, parking, and setback requirements.
While proponents see great promise from the zoning change for opening up housing opportunities, the effect will clearly take time to assess. As of mid-January, the city had received only one completed multifamily construction application, but others are said to be in the works.
Some longtime homeowners were skeptical about disrupting the status quo in their communities when the zoning proposal was first introduced, and many REALTORS® chose to take a wait-and-see approach. “I’m not against it at all,” says Lowry, AHWD, GRI, a partner and co-owner of Keller Williams Realty Integrity Lakes in Minneapolis and 2017 president of the Minneapolis Area Association of REALTORS®. Speaking to residents’ concerns that the ordinance change would affect the character of their neighborhood, Lowry says, “The intent was to try to create some increase in density, but I don’t think we’re going to see a mass demolition of Minneapolis.”
Like many other markets around the country, Minneapolis, the neighboring city of St. Paul, and the surrounding Twin Cities suburbs are experiencing close to record-low inventory and skyrocketing housing prices. Prices have climbed 7% to 10% a year since 2015, according to MAAR. Inventory in Minneapolis in November 2019 was below a two-month supply. New listings were down almost 13% year over year, while the median home price climbed from $258,000 in 2018 to $279,000 in 2019.
MAAR initially took a neutral stance on the proposal to eliminate single-family zoning, but the group is looking forward to increased home sales as a result of the zoning change. “The policy hasn’t been tested in academia or in other cities, so this is cutting-edge,” says Eric Myers, MAAR’s director of government affairs. “We would’ve liked to have seen a feasibility study on just how many lots you could convert based on size and regulations.”
The zoning change is part of the city’s 2040 Comprehensive Plan, which focuses on undoing barriers to housing, jobs, and investment. The city council wanted to open up access to homes in an era where incomes have not kept up with rising housing costs. The plan includes a new “inclusionary zoning” policy for higher-density residential projects to increase development of affordable housing. It also includes initiatives for creating public and nonprofit incubator and co-op spaces, and for attracting new capital for entrepreneurs and startups.
Minneapolis isn’t the only market considering aggressive steps to address low inventory, land shortages, and rising housing costs. Charlotte, N.C., is proposing a similar measure in its own 2040 Comprehensive Plan, and Seattle upzoned 27 neighborhoods. Last summer, Oregon became the first state to allow increased densities of up to quadplexes, sometimes called “cottage clusters,” in areas previously zoned as single-family; it will take effect June 30, 2021, for smaller cities and the year after for larger ones. And last March, the Greater Greenville (S.C.) Association of REALTORS® received a $56,000 Issues Mobilization Grant from the National Association of REALTORS® to study local government policies—including density restrictions—that are barriers to affordable housing development.
Seeking Diversity in Housing
There’s an appetite for a wider variety of housing types at varying price points in and around the Twin Cities. The metro area experienced a population surge of nearly 250,000 people between 2010 and 2018, boosting the total to an estimated 3.1 million, according to the Metropolitan Council, with roughly 500,000 more people anticipated by 2040. “We are experiencing affordability issues and sprawl, but we’re trying to nip it in the bud and address it before it’s catastrophic,” says Carrie Chang, CEO of MAAR.
On top of the area’s population growth, a compounding challenge has been a dearth of new construction as builders fell behind during the last recession, leaving the region about 300,000 housing units short today. The homeownership rate has also suffered. Before the crisis, Minnesota was among the top three states for homeownership rates, peaking at 77% in 2002, but the rate has fallen to 70%, according to the Federal Reserve.
The abolition of single-family zoning was also aimed at addressing significant racial disparities in homeownership in the city. “The homeownership gap in Minneapolis has been atrocious between whites and the black community, one of the highest in the country,” Chang says.
APM Research Lab, an arm of American Public Media, found in 2018 that the African American homeownership rate in Minneapolis was under 20%, the third-lowest in the country among 128 cities. Zoning has perpetuated the problem, Chang says, as has the history of redlining, which prevented African American buyers from attaining mortgages in predominately white neighborhoods. “Social justice and equity is something our REALTORS® care a lot about.”
John Rask, vice president of land acquisition at M/I Homes in St. Louis Park, Minn., and immediate past president of Housing First Minnesota, the state’s builders association, applauds Minneapolis for its efforts. He says restrictive zoning requirements have affected housing affordability.
“It’s unfortunate people have so few housing options,” says Rask, a former community development director in Hugo, Minn., and city planner for the Minneapolis suburbs of Plymouth and Chanhassen. “We’re going to look at zoning in 20 years and see it as driving segregation, possibly more than steering or redlining. Zoning was never meant to segregate housing types; it was meant to separate residential from industry. Residential uses shouldn’t be treated differently under the law.”
Zoning requirements themselves can add significantly to housing costs. In some cities, single-family zoning mandates include large garages, stone veneers, or cosmetic rooflines, says James Vagle, director of advocacy at Housing First Minnesota. “Those all cost money. Some cities require houses to use construction materials like Hardie Plank, which adds another $8,000 to $10,000 per home over using vinyl” to meet codes, he says.
Addressing the Affordability Crunch
In addition to allowing two or three units on a parcel of land where there was previously only one, the new Comprehensive Plan also allows for higher-density buildings to be constructed along transit corridors. “If it adds 100 units a year, it will certainly help with housing affordability,” Rask says.
But the net impact on local access to housing remains to be seen. High construction costs and narrow profit margins for builders don’t necessarily bode well for lower-income buyers. “[New construction] is still going to be subject to market forces,” Chang says.
Lowry, who estimates the price of high-end homes in two- or three-unit buildings at $1.2 million to $1.5 million in the upscale Kenwood neighborhood, says he doesn’t think the ordinance will create much low-income housing.
In addition to the purchase cost of a property with a teardown in Minneapolis, the owner would pay permitting fees and demolition costs. There are additional costs for removal and disposal of asbestos if it’s present, along with reworking the water line from one to three lines, and materials and labor. This could equate to duplexes and triplexes in the $300,000 to $400,000 range, Rask says.
Lowry points out opportunities for multifamily buildings on city-owned vacant lots in Near North Minneapolis that could be available at lower price points.
“There is an ebb and flow to the housing market, and we haven’t built enough affordable housing for years,” says Vagle. “It’s our primary goal to spend the next decade getting back to equilibrium.”
Though builders see the move to eliminate single-family housing zoning as a step in the right direction, from a regional perspective, opening up the supply of land in outer-ring suburbs and lowering the regulatory costs on new construction would go even further to address affordability, Rask says.
“We have five or six government agencies just reviewing wetlands and stormwater,” he says. “As a builder, we care about water resources and certainly don’t want to do anything to harm it. But it’s redundant having so many agencies overseeing it and inefficient to have to apply for multiple permits and engineering plans that add costs to the home.”
Balancing Change With Neighborhood Fears
Minneapolis removed parking minimums for new construction to increase affordability. But that move has some people worried. Residents put up yard signs saying “Don’t bulldoze our neighborhood!” and organized in opposition to the 2040 plan by forming a nonprofit group called Minneapolis for Everyone, voicing concerns about changing the character of the community.
Minneapolis City Council member Linea Palmisano, who cast the lone dissenting vote on the 2040 plan, says she received hundreds of calls, emails, and letters from her constituents on key issues that she felt weren’t adequately addressed, including parking, absentee landlord concerns, environmental consequences, and hard data showing that the changes would address affordability. “I fear this plan has unintended consequences for our naturally occurring affordable housing and affordable starter homes. I feel those concerns went ignored and I could not support that,” Palmisano said in a written statement.
Rod Helm, an agent with Coldwell Banker Burnet, has had a change of heart on the 2040 plan. Helm, who serves as NAR’s 2019 regional vice president for Region 8, first opposed the zoning changes. He works primarily in Southwest Minneapolis, Palmisano’s ward, a higher-end market where some neighbors are nervous about the plan. But then he examined the lack of housing supply and options, especially for older homeowners who want to stay in the city but seek multigenerational opportunities or single-level homes conducive to aging in place. “If you’re retiring right now and you want to stay in Minneapolis, your condo options are basically downtown,” he says.
One of Helm’s clients is interested in splitting a parcel and creating two luxury stacked duplexes. And Helm himself has purchased a property in Minneapolis where he’s considering building either a two- or three-unit building. He and his wife would live in one home and rent one of the other units to his son or daughter, both of whom are currently in college. The 2,300-square-foot units would cost about $1.2 million each, expensive but still lower than the price a single-family home on that site would be. In that area, he says it would be difficult to build $300,000 or $400,000 units.
“The changes are going to bring in more options in all areas of the city, and those options are going to cost less than what it would cost to build a single-family house there,” Helm says.
Parking is still the biggest concern among residents, especially in corridors with restaurants. Although he also supports public transportation, Helm doesn’t believe there’s adequate transit in place to meet the demands that will arise from the new, relaxed requirements.
On the plus side for those most worried about the effects of higher-density living, obstacles have been built in to prevent the construction of bigger buildings, such as a prohibition against merging two half-acre lots. Another positive is the likelihood that inventory will open when current owners of single-family houses sell their homes to purchase a place in a new two- and three- unit building, Helm says.
Although the impact of Minneapolis’s new zoning policies will be measured in the years ahead, Helm is excited to help set precedents for good building practices and broader housing options. “It’s exciting to be at the forefront of a new frontier of housing in the city,” he says.