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

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

The air may be filled with exhaust fumes and car horns during the rush-hour crawl down Washington Avenue on a Friday afternoon, but barely 200 yards away, John Fenn and Jill Breckenridge are out for a stroll in First Bridge Park, enjoying the unseasonably warm weather beneath the trees along the banks of the Mississippi River.

Fenn, a playwright whose A Servant's Christmas has become a holiday staple at the Great American History Theatre, spends an hour walking or skiing in the park each morning. He and Breckenridge, an award-winning poet, own a 1,580-square foot loft in the Itasca Building, an old lumber warehouse at 708 First Ave. N. Back in the 1980s, Itasca was one of the first downtown commercial/residential renovation projects developed with the help of tax increment financing (TIF) by the city of Minneapolis. A friend of a friend recommended the Itasca to them nine years ago. They liked the ease with which their warehouse loft let them carve out living quarters and separate offices for both writers. In 1995, there weren't many places like it downtown.

"Compared to what's happening now, I guess we were pioneers. Certainly none of this used to be here," Fenn says, gesturing at the suburban-looking decks and screened-in porches that comprise the backyards of a section of The Landings, an opulent, multiblock array of townhomes overlooking the park and the Mississippi on the other side of West River Road. "There's a little more traffic along the parkway now, but it's not intolerable," Breckenridge says. Adds Fenn with a raised eyebrow, "And it certainly has taken our property values and scooted them up." "There's no way we could afford where we live if we bought it now," Breckenridge emphasizes. "We're very lucky."

A residential housing boom is steadily changing the character of downtown Minneapolis, especially along the riverfront, where high-priced condos and town homes are sprouting like weeds, extending back along First Avenue North and throughout what is now known as the "North Loop" area of the city. It is difficult to quantify accurately--the city's new department of Community Planning and Economic Development admits that it receives almost weekly requests for reliable downtown housing figures, but has been unable so far to assemble any cogent ones. Much of the data on the city's housing websites is broken down only to the "Central Community" level, which encompasses an area greater than downtown proper, and uses information from the 2000 census, which can't account for the growth of the last three years.

And that recent growth has been phenomenal. One of the more respected firms with regard to downtown housing is Maxfield Research Inc., which prepares market feasibility studies for realtors. Maxfield President Mary Bujold says the first signs of a viable market for new housing downtown became apparent in 1994. From 1994 to 1997, a total of 80 housing units were "absorbed" downtown, meaning that they had been sold but perhaps not yet occupied because the building was under construction. Since then, the rate of absorbed housing has steadily risen, from 406 units from 1997 to 2000 up to 1,035 new units since 2001. In addition, Bujold says that approximately 200 more units have been definitively planned, and that 3,400 downtown units are in the initial planning stages. Even given Bujold's caveats about the latter figure--"some may happen, some may not; some could take two years, some could take ten years"--this boom seems destined to make a substantial impact on a downtown that currently, according to Maxfield's estimates, contains approximately 11,000 total housing units.

There are a variety of reasons for this enormous new supply and demand. Traffic congestion has made the suburban commute increasingly frustrating for people who work in the city, some of whom have decided to park the car and buy a condo. Then there are folks like Fenn and Breckenridge, who in demographic parlance are baby boomers turned empty nesters. With the kids grown and gone, and more disposable income on hand, many want to indulge in the plethora of restaurants and nightlife options the city has to offer. (According to Maxfield, 56 percent of those who own their living space downtown are over the age of 45, while 71 percent of downtown's renters are younger than that.) Another factor is the ongoing low interest rates, which reduces the financial burden for builders, buyers, and renters alike.

In some respects, the spike in downtown residency represents a belated vindication of the Sharon Sayles Belton administration, which was criticized for approving tax breaks and other sources of financing to development projects in the mid- and late '90s. During her mayoral tenure, Sayles Belton was roasted for providing favors for the Brighton Development Corporation, dealings made more controversial by her friendship with Brighton executive Peggy Lucas. But now those millions of dollars' worth of government subsidies are widely regarded as a catalyst to the current housing boom. "It is clear that the private sector wasn't going to do anything about historic preservation or cleaning up [contaminated land sites]--but we did and it was a good investment," says Seventh Ward City Council member Lisa Goodman. She is referring to numerous projects, among them the historic preservation aid Brighton received for Lourdes Square and the city's decontamination of the site upon which Sherman Associates built The Landings beginning in the mid-'90s. "I urge people to remember what that area [along the river] was like. It could have remained in industrial use instead of becoming a crown jewel for our city."

"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."

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.

In addition, because the metro area encompasses the wealthier suburbs, 50 percent of the metro median income is actually quite high--more than $37,000 for a family of four, meaning that developers can satisfy the affordable housing requirement by selling or renting units to people solidly ensconced in the middle class, at a price that's beyond the reach of the working poor. Meanwhile, the city will probably never come close to replacing the 3,500 units of affordable housing--much of it in residential hotels--torn down between 1970 and 1990.

"I have spent a career working on affordable housing issues," says Lisa Goodman, "and it's hard to get around the fact that land value drives housing costs and the land values downtown are very expensive. It's the same reason we can't get a grocery store downtown, because land costs are so high and grocery [profit] margins are so low. For developers, the construction costs and land costs aren't much less if they're building affordable housing, so why sell one for $130,000 and another for $250,000 or more?"

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