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15 |MARKET UPDATE: AFFORDABLE RENTAL HOUSING IN THE TWIN CITIES KEY ISSUES FACING AFFORDABLE HOUSING HURDLES TO NEW SUPPLY Vast Production Shortfall in the Suburbs – For a variety of reasons, construction of new affordable rental housing has gained only limited traction in the outer suburbs. The issue is particularly important because 55% to 65% of Twin Cities jobs and residents are located in the outer suburbs and new affordable rental housing there is in very high demand. Thousands of affordable units are needed annually in the outer suburbs. Depletion of “NOAH” Supply – Naturally occurring affordable housing (“NOAH”) units – lower-priced units privately owned without subsidy – account for 55% of the affordable rental supply in Minnesota, but the supply is dwindling. Each year, the state loses an estimated 2,000 NOAH units as properties are sold, improved and priced up in rent.1 At least half of this loss occurs in the Twin Cities, negating much of the gain made by new affordable construction. Rising Costs: Interest Rates, Building Materials and Skilled Labor – Broader interest rates have ticked up in 2018 on the heels of two federal funds rate increases, with a third increase expected in December. Construction labor and material, notably Canadian softwood lumber, have also increased in price well above inflation in recent years as a result of high material demand, new tariffs and an overall shortage of labor. Master electricians, in particular, are in great shortfall in the Twin Cities due in part to labor competition from the fast-growing solar industry. Combined, these cost factors have created incremental funding needs for affordable projects and put pressure on developers to find very valuable gap financing. NIMBYism – Opposition to affordable housing is still a powerful force throughout the Twin Cities. Projects in many areas face organized opposition claiming – despite evidence to the contrary – a wide range of purported negative impacts. A recent 68-unit project in an outlying suburb faced 10 months of opposition from 1,000 residents only to have the City Council unanimously approve the project based on the Council’s belief in overwhelming need. The attractively-built project leased quickly, has a waiting list “in the hundreds” and is home to retirees, local government workers, Target employees, service industry workers and laborers, among others. In reality, new affordable rental projects are indistinguishable from other private sector projects, and they end up being very valuable assets to a community’s housing supply. DEMAND PRESSURES Demographic Waves: Millennials (1981-1996) and Baby Boomers (1946-1964)–The two largest population cohorts in U.S. history have converged on rental housing at the same time. Millennials are in their prime rental years and comprise the largest number of renter households in poverty, 5.3 million households.2 Closely following are Baby Boomer households, 5.0 million of which also live at poverty income levels. Millennials, with age and time on their side, will hopefully work their way into higher incomes in the coming years. Baby Boomers, conversely, are starting to swell the ranks of the impoverished as their work careers cease, they spend down assets and many find that they have little or no retirement savings. Cost Burdened Households –A household paying in excess of 30% of gross income for housing costs is considered cost burdened. More than 160,000 renter households in the Twin Cities are estimated to be cost burdened.3 Many newly-formed low- income households (e.g., Millennials) become cost burdened without new construction to meet their increasing numbers. Persistent Homelessness – Many local efforts to fight the problem of homelessness have helped and the numbers have dropped by 8% since 2012. However, the most recent survey from Wilder Research in 2015 still found 6,200 homeless individuals in the Twin Cities, 35% of whom were children. Homeless individuals and families often need housing with services. Rising Rents / Stagnant Wages –Two Labor Department figures from this year show the underlying stagnation of real wages in the U.S.: The strong annual wage growth estimate of 2.9% in August was fully offset by the July inflation estimate of 2.7%. Despite longstanding wage stagnation, average rents in the Twin Cities have risen by 29% since 2010 (Marquette Advisors). 1 “The Loss of Naturally Occurring Affordable Housing,” Minnesota Housing, May 2018 and The Governor’s Task Force on Housing, August 2018. 2 “5 facts about Millennial households,” Pew Research Center, September 6, 2017. 3 “State of the State’s Housing 2017,” Minnesota Housing Partnership, March 2017.