If You Lived Here,You'd Be Downtown By Now

Demographics, interest rates, and shrinking office rentals make for a downtown residential boom

"There's no question that government has played a vital role in this," says former council member Steve Minn, who is now involved in downtown housing as a principal in Lupe Development. "Even though I was a vocal critic of Sharon giving Brighton subsidies, it made a difference in this whole area being revitalized. Developers like Brighton and HuntGregory and Sherman were pioneers in making this lifestyle along the river acceptable.

"Instead of the sterile high-rises of the '80s, they embraced the grittier loft concept, with concrete floors and high ceilings and exposed electrical. It's no longer about a drywall box with seven-foot ceilings. It's about offering something you can't get in the suburbs.

"Another thing I voted against on the council was a half-million dollars to get the Mills Ruins Park established, and I was wrong, because it has also made a difference," Minn says. "You've got the park along the river, an arts, sports, and entertainment district, with light rail linking us to the mall and the airport and running right down the spine from the Dome hopefully to a new ballpark. Throw in the council providing late-night bar closings, and we are almost becoming a real city."

Itaska Building resident and urban pioneer John Fenn
Sean Smuda
Itaska Building resident and urban pioneer John Fenn

There's a chance Minn's change of heart on subsidies may have been influenced by the tax increment financing provided to his own Stone Arch housing development along the river. But even Central Community Housing Trust President Alan Arthur, whose agency helps develop and manage over a thousand units of affordable housing downtown, acknowledges that the subsidies provided Brighton and other developers in the mid-'90s "turned out to be a good investment. The city always needs to be strategic about where it invests its resources, and there is a need for more affordable housing. But I believe the TIF money for Brighton and others helped get people to move downtown and that is a good thing."

"I do think there was a perception when we did fund and finance projects in the beginning that there were preferred developers," Goodman allows. "Certainly it was thought that Brighton was receiving a larger share. Now, they may have been the only one willing to step forward in some cases, but like any business, they weren't doing it for fun, either. Now you're seeing a much greater diversity of developers, and that has been a very good thing for the city."

But in some respects the market has been too good, driving the prices of many projects beyond the means of many people. "River Station was originally developed as entry-level housing--prices started at the low to mid-100s, but the demand and the sales were so great that it pushed the prices up," Bujold says. "Sort of the same thing happened to Renaissance on the River; it was going to be mid-level town homes, but demand pushed prices up. For The Landings, it was always an upper-end price--they opened at $380,000, but in the end the most expensive units sold at $2 million. I don't think they expected that. But the economy is so strong, and with interest rates low there is a great demand for product."

Minn doesn't think the good times can continue to roll indefinitely. "The prices are escalating because every idiot and his uncle are trying to get in the development business. Money is so cheap that everybody thinks they can build faster than the next guy and avoid the crash. Another obstacle is that there's absolutely no activity in offices and commercial warehouse space--that market is oversaturated. When the dot-com businesses blew up, they laid off a lot of people and did a lot of contracting and subleasing of space, so nobody is building anything new in offices.

"That leaves big firms like Mortenson and McGough and Opus with huge staffs and no projects, except some public government buildings and the occasional stadium they all fight over," Minn continues. "So now they are getting into housing. But the only thing they know how to do is towers. There will be a corrective action. We will build until we're overbuilt, build ourselves into losses sometime in the next 12 to 18 months. And once interest rates go up, this market will dry up like a mouse's asshole. If you see interest rates go up 150 basis points [1.5 percent], housing construction will come to a screeching halt."

One advantage of an overbuilt market would be more affordable housing as rental and purchase rates decline. Over in the Loring Park area, where a significant gay population established one of the city's more stable residential neighborhoods decades ago, Goodman sees some relatively affordable rental units opening up as long-time denizens invest in higher-priced options being built in that part of town. There's also been a fair share of affordable housing rehab and construction in less trendy pockets of the city. Alan Arthur's CCHT manages nearly 20 projects comprising well over 1,000 units downtown. But fewer than 150 of them are located in the suddenly prestigious North Loop, Downtown East, and Downtown West neighborhoods.

Arthur argues, "There ought to be affordable housing as part of the upper-level communities we are building downtown. We as a city should do it intentionally and [plan well] and not be simply at the mercy of the market." In that spirit, the City Council passed an affordable housing resolution five years ago that stipulated any developer seeking city financing for a project involving more than 10 units must make at least 20 percent of them affordable to those earning half the metro median income. But Arthur points out that the resolution has been weakened in recent years. For developers who demonstrate they can't achieve the 20 percent threshold, there is an alternative compliance mechanism that allows them to instead pay $80,000 into an affordable housing fund for every unit they fall below 20 percent. "But of course it costs more than $80,000 to develop each unit," Arthur says, giving developers an incentive to simply pay into the fund.

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