Housing Industry News Vol. 5 Issue 5 - October 2021 by Housing First Minnesota

VOL. 5 ISSUE 5, OCT. 2021

THE MINNESOTA HOUSING INDUSTRY NEWS SOURCE BY HOUSING FIRST MINNESOTA • HOUSINGINDUSTRYNEWS.ORG

Housing Commission convenes to tackle affordability crisis Meeting for the first time since early 2020, the Legislative Commission on Housing Affordability gathered in mid-September to resume its work. The meeting featured public comment from an array of industry stakeholders as well as legislators’ perspectives on the task that lies before the commission. From the meeting’s outset, the focus was on housing supply and the changes needed to increase the production of starter homes. “Zoning is a very real issue and there are regulatory changes to a locality’s zoning framework that could help facilitate more housing,” said Anne Mavity, executive director of Minnesota Housing Partnership. The need for housing was illustrated by a report that showed the Twin Cities metro, which is Minnesota’s largest housing market, ranked last in the United States for supply of homes for sale or rent. “We haven’t built enough homes for nearly 15 years, and our problems are driven primarily by the vanished starter home in our state. A housing market cannot function properly without the steady supply of new and existing starter homes,” said David Siegel, executive director of Housing First Minnesota. “Over the past decade-plus, starter home construction has been largely blocked by the accumulation of outdated and needlessly expensive approval and zoning processes,” he continued. Zoning and housing approval processes have been broadly cited by housing experts across the country as the critical issue to address housing supply, which in turn directly impacts affordability. Given the complex regulatory structure CONTINUED >> PAGE 7

INSIDE THIS ISSUE

Update on latest RRP Rule PAGE 1

New code technical groups formed PAGE 5

Housing market eases up from the all-out frenzy PAGE 11 During a mid-August press conference at the state capitol, Rep. Steve Elkins introduced the most comprehensive housing affordability bill in decades.

Housing Affordability Act introduced Media coverage sparks bipartisan calls for legislative action The legislature adjourned last spring, but a bipartisan group of legislators is still pressing forward with a major housing affordability initiative. Following the release of the Star Tribune’s August deep dive into exclusionary zoning practices in the Twin Cities, Rep. Jim Nash (R-Waconia) called for the Housing Affordability Commission to meet promptly, and Rep. Steve Elkins (DFL-Bloomington) introduced the most comprehensive housing affordability bill in decades. “Homeownership should be an attainable dream for all Minnesotans, and we need to take a comprehensive look at the multiple inputs that drive costs to skyrocket: zoning, land use, required elements for decorative aspects of homes by a

city, inspection fees, impact fees and many others,” stated Nash when calling for the bipartisan, bicameral Housing Affordability Commission to meet. “I’ve said all along that the solution is like solving a quadratic equation in algebra class: so many integers that need to be worked on separately in order to pull together the entire answer for the problem. Everyone deserves a ‘North Star‘ to head towards, and that comes with the safety and security of homeownership.” During a mid-August press conference at the state capitol, Elkins introduced a first-ofits-kind Housing Affordability Act as a “grand bargain” of sorts. The extensive bill includes provisions previously introduced by Sen. Rich

Draheim (R-Madison Lake) that had bipartisan support during the 2021 legislative session. Elkins bill calls for many changes in planning and zoning at the local level such as limits on aesthetic mandates, caps on park dedication fees, changes to building permit systems and reporting, adjustments regarding the disclosure of energy code paybacks, and authorization of impact fees and street improvement districts. In introducing the bill, Elkins said the goal is to develop thousands of additional units of entry-level workforce housing across the state every year to meet the needs of newly forming young families. “On one hand, financially stressed cities need a means to finance the basic infrastructure required to support new

housing development,” said Elkins. “On the other hand, housing developers need relief from regulatory restrictions that are preventing them from building an adequate supply of new homes and apartments that are affordable to young families. “This bill addresses both sides of that equation. It would allow cities to use cost-based development impact fees to pay for roads and infrastructure. New development should pay its own way, but no more than that. “At the same time, the bill would sweep away zoning restrictions used to promote the construction of expensive homes on large lots and would remove institutional barriers to CONTINUED >> PAGE 7

MDH releases latest Minnesota lead paint remodeling regulations The Minnesota Department of Health (MDH) released its latest proposed Lead Renovation, Repair and Painting (RRP) Rule in early September. The RRP Rule Minnesota seeks to adopt would regulate remodeling practices in pre-1978 homes and child-occupied facilities. CONTINUED >> PAGE 4

HOUSING INDUSTRY NEWS

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PRESIDENT’S NOTE

Fixing our housing supply problem The Minnesota Population Center analyzed the U.S. Census Bureau’s inventory of homes for purchase across the top 56 regions of the United States and found bleak news for the Twin Cities metro: Our region ranks last in the United States for available homes for purchase or rent. As the largest housing market in our state and the hub of economic development, this finding should concern everyone in Minnesota. As members of the housing industry, we know how we got here. Since the recession, we have substantially under built homes annually. This has created a bottleneck of demand and simply not enough homes for all our current residents, and the people we are hoping to attract to become Minnesota residents. Our region is growing, and our housing inventory lags. Why have we under built? It’s a mix of restricted land availability, regulatory costs, labor challenges and, now in the COVID era, a disrupted supply chain. These factors combine

to make the basic fundamentals of building homes extremely challenging. Some of these issues will resolve over time; we are already seeing lumber prices moderate. But there are other concerns relating to steel, components and appliances that will take longer, and it’s unclear where pricing will settle. Labor has gone up and down, but over time we expect innovation and an emphasis on career opportunities in construction to gain traction. That leaves us with our outdated system for approving housing projects. What made sense 40 years ago doesn’t work very well today. Our market is demanding more ﬂexibility on home size and design. Long and cumbersome processes for permitting and land approvals block affordable options from coming on the market. Without those starter homes, the moveup cycle is impacted, and we find ourselves with too few homes and soaring prices. The good news? The Commission on Housing Affordability is geared up to review this issue and consider strategies to encourage a

HOUSING INDUSTRY NEWS October 2021, Volume 5, Issue 5 PUBLISHER David Siegel David@HousingFirstMN.org EDITOR Katie Elfstrom Katie@HousingFirstMN.org GRAPHIC DESIGN Emily Doheny ACCOUNTING Janice Meyer Todd Polifka 2021 President, Housing First Minnesota

ADVERTISING SALES Brad Meewes Kori Meewes

surge in newly built homes. We have a long way to go but fixing our housing supply problem is job one for our region and state.

CONTRIBUTING WRITERS Katie Elfstrom Katie@HousingFirstMN.org

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Onward, Todd Polifka, Custom One Homes

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Kristen Ober

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Housing Industry News is a publication of Housing First Minnesota. Housing Industry News is published and distributed six times per year to housing industry professionals and others associated with the homebuilding industry. Neither the advertisers, nor Housing First Minnesota, will be responsible or liable for misinformation, misprints, typographical errors, etc., herein contained. For address change information, contact Housing First Minnesota. Suggestions, ideas and letters are welcome. HOUSING INDUSTRY NEWS 2960 Centre Pointe Drive Roseville, MN 55113 info@HousingFirstMN.org www.HousingFirstMN.org Housing Industry News is published by Housing First Minnesota

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HOUSING INDUSTRY NEWS

THE HOUSING BEAT

Across the country, there is much talk about housing HERE ARE SOME OF THE LATEST QUOTES ON THE STATE OF THE INDUSTRY:

It's clear from the data that the growing Twin Cities region needs more housing, a wider range of housing types, and more affordable and deeply affordable places to live.” STAR TRIBUNE EDITORIAL BOARD

For years, local governments have erected unnecessary barriers that stand in the way of homeowners, homebuyers, and homebuilders using their land as they see fit, driving up prices for all Americans.”

When cities have been consistently failing to build the housing we need, it’s time for states or provinces to step in and regulate those cities—to assert the state’s power to set basic standards for local zoning.” MICHAEL ANDERSEN SIGHTLINE INSTITUTE

U.S. SEN. TODD YOUNG

Unfortunately, local city councils, which set housing standards through zoning ordinances, often impede new construction. Even when projects are approved, they are rarely built to the maximum density allowed and often downsized as the project progresses, often in response to the concerns of the most vocal residents.” SERGIO LOPEZ CITY COUNCIL MEMBER, CAMPBELL, CA

As we start to see the prices get so extreme, we hit a bit of an affordability ceiling for more and more households. They just cannot compete against the prices that they see.” SKYLAR OLSEN TOMO NETWORKS

Finally, exclusionary zoning contributes to the racial wealth gap. If Black families are excluded from higher priced neighborhoods or if neighborhoods where Black families live are zoned into being less valuable, the homes purchased by Black families will not be worth as much over time as those of white families.” BIDEN ADMINISTRATION

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HOUSING INDUSTRY NEWS

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REGULATORY AFFAIRS CONTINUED FROM PAGE 1

MDH releases latest Minnesota lead paint remodeling regulations Since 2016, MDH has worked to develop renovation and remodeling rules that would replace the Environmental Protection Agency’s (EPA) existing RRP Rule. By assuming local control over the rule, MDH will also develop its own licensing, training and enforcement programs. If adopted, Minnesota would become the 16th state to take local custody of the RRP Rule. Industry shares concerns Following the release of the previous draft of this proposal in May, Housing First Minnesota, the Minnesota Realtors® and the Central Minnesota Builders Association called for a stakeholder meeting on the rule as well as additional documentation. In response, MDH held a meeting on Sept. 15. During the September stakeholder meeting, these three groups and their technical experts participated in a walkthrough of the proposal and outlined technical concerns and potential conflicts with existing state law. Contractors that would be subject to this proposed rule have long worried that MDH intends to seek enforcement actions for paperwork issues, violations that have nothing to do with actual lead dust mitigation or occupant safety. Those fears were confirmed during the stakeholder meeting with MDH, confirming it does intend to review paperwork for potential violations, although staff did state that these paperwork violations may be forgiven. Under the latest rule, MDH can seek review of paperwork for up to five years after the renovation, two years longer than the current EPA rule requires. “It has taken five frustrating years to get a straight answer to the clerical enforcement question,” said David Siegel, executive director of Housing First Minnesota. “We believe the department should be focused on actual violations during the renovation process, not paperwork that may have minor violations and no impact on homeowners.” Other Minnesota-specific provisions present problems for the rule such as a lack of clarity of training locations in border communities, unclear language regarding covering doors and windows on exterior renovations, murky end-of-business recordkeeping, paperwork requirements not included in the EPA’s rule and questions regarding the responsibility of record-keeping if a business ceases operations. Housing industry experts have also identified a potential conflict regarding issuing permits under the rule when the general contractor is not a certified lead renovator and is relying on a subcontractor for the demolition work subject to the rule. For five years, the industry has asked MDH to engage the Minnesota Department of Labor (DLI) in a conversion regarding this and other significant statutory conflicts but to date, MDH has not collaborated with DLI.

The Central Minnesota’s Builders Association and Housing First Minnesota provided comments to MDH on the proposed rules that outline procedural and technical concerns. Neither group was supportive of the proposal as written but offered recommendations to MDH to make the proposal workable for Minnesota renovators and their clients. Industry-led changes This effort is now entering its fifth year of work, with industry advocates pushing for improvements to the proposal that bring common sense and highlight affordability. Comparing the initial working draft shared in summer 2017 to the latest MDH proposal, several key items have changed. Notification requirements now more closely mirror the EPA’s rule. Training and certification are now valid for twice as long as in earlier drafts, and the initial requirement for on-site, self-contained showers has been removed. The changes have been incremental but successful, according to industry advocates. Yet those involved with the process say many of the changes should have been made sooner. “Until the latest version was released, the Department of Health's mandate included work practices that could have unintentionally been dangerous for contractors,” said Nick Erickson, director of research and regulatory affairs for Housing First Minnesota. “Thankfully, our efforts were successful in removing some of these requirements and unnecessary proposals. We’ve made a big difference over the past five years, but there is still much work to be done.” Next steps Lead remediation trainers, remodelers, renovation subcontractors and suppliers, and housing groups have submitted technical comments to MDH on the latest draft. Comments were due Sept. 22. MDH is reviewing comments now and considering revisions. Any changes to the rule must be reviewed and approved by the EPA before proceeding with the rulemaking process in Minnesota. In the meantime, MDH is seeking help from remodelers and property owners on preparing a cost estimate. “MDH acknowledges that RRP compliance adds to the cost of renovation in properties affected by the rule, increasing expenses for renovation firms, lead professionals, property owners, tenants and other affected parties,” MDH stated in an email to stakeholders. The agency gave a deadline of Oct. 15 for cost estimates. MDH aims to complete its work in the coming months so that the rule can be implemented in spring 2022.

Remodelers and Renovators Town Hall: SAFE AND AFFORDABLE HOME RENOVATIONS AT RISK From the MPCA’s demolition initiative to the Minnesota Department of Health’s Lead Paint proposal, learn about the potential regulatory changes that could put an end to safe and affordable remodeling projects and how you can protect your businesses and customers. The event will be recorded and available for replay. Open to all remodelers, exterior contractors and subcontractors engaged in renovation work.

Scan to RSVP, or visit HousingFirstMN.org/

HOUSING INDUSTRY NEWS

The court stated that if the eviction moratorium is to continue, it must be authorized by Congress.

Supreme Court invalidates CDC eviction moratorium, no impact on MN eviction deadline State payment of COVID rental relief slow The U.S. Supreme Court ruled against the Center for Disease Control’s (CDC) eviction moratorium on Aug. 26, citing the lack of authority for the CDC to issue such an order. “It is indisputable that the public has a strong interest in combating the spread of the COVID–19 Delta variant,” the court wrote in an unsigned opinion. “But our system does not permit agencies to act unlawfully even in pursuit of desirable ends.” The ruling was expected since the CDC eviction moratorium was announced on Aug. 3. “The bulk of the constitutional scholarship says that it’s not likely to pass constitutional muster,” President Biden said at the time. “But there are several key scholars who think that it may, and it’s worth the effort.” The court said that if the eviction moratorium is to continue, it must be authorized by Congress. The ruling only invalidated the federal CDC moratorium and has no impact on Minnesota’s eviction moratorium. Eviction protection for those not eligible for Minnesota’s COVID-19 rental assistance expired on Sept. 12. Minnesota’s eviction protection ends for all Minnesotans on Oct. 12. Through Sept. 21, Minnesota has given out roughly $61.5 million in COVID-19 rental assistance of the $257.5 million requested, a delay that has drawn scrutiny from renters, multi-family housing providers and legislators.

WHEN: WHERE:

SPEAKERS:

Thursday, Nov. 18 2:30-3:30 p.m. Housing First Minnesota 2960 Centre Pointe Drive Roseville, MN 55123 Bill Gschwind, Minnesota Construction Law Services Nick Erickson, Housing First Minnesota

City of Lakeville sued over denial of affordable housing project A June 2021 denial of a proposed multifamily project in the city of Lakeville has resulted in the property owner suing the city. H&W/Atlantic Funding, LLC filed a civil suit on Sept. 1 after a comprehensive plan amendment regarding a 19.55-acre parcel of land it owns in Lakeville failed to achieve the required votes. The owner has attempted to market the property for commercial use for more than a decade, but the only interest in the property has been for multifamily development. The parcel has both commercial and multifamily guided uses under the city’s comprehensive plan. The development proposed by Continental 564 Fund, LLC on the H&W-owned land would have contained 288 rental townhome units divided across 12 buildings. No unit would be greater than two stories in height, with a net density of 18.2 units per acre. The project conformed to the Metropolitan Council’s affordable housing criteria and would have satisfied 20% of the city’s affordable housing goals. The city took issue with the exterior cladding Continental prosed. According to the complaint, council member Luke Hellier “stated a concern about creating a ‘precedent’ for future development based upon use of exterior finishes such as vinyl, as opposed to stone or brick. The project did not initially incorporate these finishes because they would increase lease rates and make it more difficult to keep the townhome units affordable.” The complaint also states that other affordable housing projects near the proposed development use vinyl siding for exterior cladding. At its June 7 meeting, the Lakeville City Council voted 4-1 to extend the vote on the proposed project to allow the developer to consider changing the siding from vinyl to luxury upgrade. On June 21, the council voted 3-2 to approve the comp plan amendment related to the proposed development. The vote required a 4-1 majority to pass, and the two council members voting against the amendment declined to allow city staff to continue working with the developer on the project. H&W is seeking a declaratory judgment stating the denial was not supported by evidence and a court order that the city approve the proposed development. Larkin Hoffman is representing H&W (for disclosure, Larkin Hoffman has represented Housing First Minnesota in several housing-related cases and lobbies on its behalf at the Legislature). The Lakeville suit isn’t the first legal challenge to a project denial in 2021. Earlier this year, the city of Plymouth was sued over its denial of a proposed subdivision replacing the shuttered Hollydale Golf Course. The suit was settled out of court allowing the Plymouth development to proceed.

H&W/Atlantic Funding, LLC filed a civil suit on Sept. 1 after a 288-unit development on their land was shut down.

New code technical groups formed, Energy Code update, Plumbing Code edits continue, environmental reviews for development, demolition initiative The Minnesota Construction Codes Advisory Council (CCAC) approved two new technical advisory groups (TAGs) at its Sept. 23 meeting. The Window Washing TAG and Building Code TAG were formed in response to proposed legislation from the 2021 Minnesota Legislative Session, bills that will remain in play during the upcoming 2022 Minnesota Legislative Session. The Building Code TAG will study building permit overcharges, adult changing table requirements and two provisions mandating a payback period of the Minnesota residential energy code. Members of the Building Code TAG include Scott McKown and Karen Gridley, Minnesota Department of Labor and Industry (DLI); Irene Kao, League of Minnesota Cities; Charlie Vander Aarde, Metro Cities; Nick Erickson, Housing First Minnesota; Brian Hoffman, city of St. Louis Park; Kurt Welker, Welker Custom Homes; Barry Greive, Target; and Dana Murdoch, University of Minnesota. The Window Washing TAG will study window washing anchors on buildings greater than four stories in height. Members of the Window Washing TAG include Greg Metz and Daniel Kelsey, Minnesota DLI; Kyle Berndt, Minnesota Multi-Housing; Eric Crone, Columbia Building Services and

SEIU Local 26; Larry Farris, BKV Group; Wendy Rannenberg, city of Duluth; and Nancy Zentgraf, Minnesota Occupational Safety and Health Administration (MNOSHA). In addition to these TAGs, CCAC received updates from the Flood Proof TAG and the Frost Depth TAG and an overview of the process to review the residential 2021 International Energy Conservation Code (IECC). Residential Energy Code The state of Minnesota must review the 2021 IECC by July 28, 2023 and inform the U.S. Department of Energy whether or not it will be adopted by Minnesota. The Minnesota DLI is looking to hold a hearing to evaluate the 2021 IECC in the spring of 2022. Minnesota is not required to adopt the 2021 IECC for residential construction. Minnesota is on a six-year code cycle and the Commissioner of DLI affirmed an administrative law judge’s recommendation not to adopt a new residential energy code when the building codes were updated in March 2020. Plumbing Code edits The Plumbing Board reviewed additional

modifications to the Minnesota Plumbing Code at its September meeting. These changes are not considered substantive and were minor reference changes and copy edits not found in previous technical corrections. The next iteration of the plumbing code goes into effect on Dec. 17, slightly more than three years after work began on the review of the 2018 Uniform Plumbing Code. Environmental Assessment Worksheet pilot program At the Sept. 15 meeting of the Minnesota Environmental Quality Board (EQB), the inter-agency panel approved a pilot program evaluating revisions to the Environmental Assessment Worksheet (EAW) form that include questions for greenhouse gas quantification and assessment as well as adaptation and resiliency information. The pilot program has drawn criticism from those involved with land-use applications. These reviews can cost tens of thousands of dollars per project, yet they cannot be used to deny or approve a project. Housing First Minnesota, Central Minnesota Builders Association and Pulte Homes weighed in on the proposal. The comments from all three groups centered around the state’s housing crisis and how

these reviews will increase costs without productively altering the review process. The pilot program is set to run through 2022. State demolition diversion program The Minnesota Pollution Control Agency (MPCA) is continuing to work on its demolition diversion program. The goal of the program is to prevent construction waste from reaching landfills. No formal proposal has been announced, but the workgroup seems to be gravitating toward mandating demolition waste management plans and increasing demolition costs by sending materials to reuse centers. “There seems to be a misconception of which materials can be reused and which materials the homeowners want to reuse,” said Nick Erickson, director of research and regulatory affairs for Housing First Minnesota. “By requiring so-called 'unbuilding’ in lieu of demolition, the MPCA would fundamentally and permanently negatively alter the remodeling and home renovation industries.” The MPCA has yet to engage DLI in this discussion.

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HOUSING ON THE HILL

What’s in the Housing Affordability Act? With the goal of increasing the construction of starter homes throughout Minnesota, the Housing Affordability Act modernizes planning and zoning to lift regulatory roadblocks, while creating a new impact fee structure for local governments. Here is a deeper dive into the introduced version. Article 1. Creating new authority for impact fees. Authorization of impact fees by local governments for items such as transportation, water supply, wastewater and more. This would require that these funds be segregated and refunds be issued if not utilized in a certain time period. This legislation has been discussed at the Capitol for many years, but it is typically introduced as a stand-alone bill. Article 2. Creating new authority for municipal street improvement districts. Authorization of municipal street improvement districts to improve or maintain streets in a certain area of the city. Funds would be in a segregated account with the ability to utilize over 20 years. Article 3. Resolving planning and zoning conflicts to give more certainty on development. Official controls do not conflict with a comprehensive plan if they permit all the uses that are permitted or required in the

comprehensive plan at the densities permitted or required by the comprehensive plan, and they prohibit all the uses that are expressly prohibited by the comprehensive plan. Article 4. Creating development by right; limiting PUD usage; prohibiting aesthetic mandates. This would allow duplexes in all areas zoned for single-family residential development. Additionally, municipalities would not be able to require a planned unit development (PUD) agreement if the proposal complies with the existing city zoning ordinances. Local governments would not be able to mandate that homes have a certain form of aesthetic and could mandate no more than a one-car garage. Article 5. Capping park fees. This would authorize local governments to require sidewalk dedication in addition to the many other dedications already in statute. It would cap park fees at no more than 10% of the fair market value of the development. Landowners would have the option of a cash fee, donating land,

building recreational facilities or a combination of these. Article 6. Metropolitan area density of development. A land use plan and the related official controls for an area identified as land that may come within the urban service area for residential development and that is not connected to the metropolitan disposal system, must provide for a density of residential development of at least five units per acre, or if intended to remain rural of no more than one unit per ten acres. Article 7. Metropolitan Council; sewer availability charges. The council shall adjust the Sewer Availability Charge (SAC) so that development in unsewered areas is assessed at three SAC units per acre without regard to the actual number of connections. Article 8. Low-income housing applications. Adjusts applications allowed and prohibits certain types of late fees.

Article 9. Building permit deadlines. Cities and counties would not be able to opt-out of building permit deadline requirements. Article 10. Building permit fees established by square footage. A building permit fee would be based on a cost per square foot determined by the city. Article 11. Creating an energy cost disclosure and energy code payback period. Beginning in 2026 and every six years after a new energy code could not be adopted unless approved by law. New additions to the energy code would be required to have at least a 30-year payback. Article 12. Updating the construction and development fee report. Adjusts the annual construction and development fee report that is required to be filed by local units of government. *Note: The introduced version will be debated and amended as it moves through the legislative process. Housing Industry News will cover this and all other legislative activity relating to housing.

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CONTINUED FROM PAGE 1

Housing Affordability Act introduced the construction of new entry-level homes, apartments and condominiums. This is a complex problem which requires a comprehensive solution.” Elkins is expecting to officially introduce the bill in an upcoming legislative special session and to work through the details of the bill with the Legislative Commission on Housing Affordability.

Elkins said the goal of the bill is to develop thousands of additional units of entry-level workforce housing across the state.

CONTINUED FROM PAGE 1

Housing Commission convenes to tackle affordability crisis with a multitude of local governments and the local reliance on the current system, changing these entrenched systems will be a challenge. “This is a complicated issue. I liken it to a quadratic equation. It’s not just one thing; it’s multiple things. Many people have been saying that regulatory reform is needed for a long time and the most recent research pieces are also saying that,” stated Rep. Jim Nash (R-Waconia). Housing policy perspectives vary throughout the state, which will require careful analysis by the commission. In addition to regulatory issues, investor activity in housing was also cited as an issue impacting homeownership opportunities. “One of the issues that I’ve seen in my district is a lot of those starter homes are being bought up and they now have a 10-story apartment building there. It’s increasing the number of housing units available, but we’re losing those starter homes,” said Nash. The commission’s focus in the coming months will begin with a review of housing affordability proposals, starting with a comprehensive proposal from Rep. Steve Elkins (DFL-Bloomington). His approach focuses on creating a cost-based impact fee system for cities to recoup costs of growth, balanced with a regulatory overhaul to remove the local barriers that have stiﬂed growth for decades. “In my bill I’ve got a provision that says newly developing cities you have to allow homes to be built on a fifth of an acre and I’ve got this incredible pushback. The perfectly suitable starter home that my legislative assistant lives in is half of that and still you have cities saying, ‘oh god we can’t stand

the density of a fifth of an acre home or a duplex on a quarter acre,’” Elkins testified. Local government representatives appeared before the commission with their housing policy priorities breaking from the focus on regulatory roadblocks and instead focusing on state subsidy and local control of housing approvals. “To have that effective state-local partnership we want to think about incentive-based approaches and then possibly considering state supported resources for cities that waive fees,” stated Daniel Lightfoot with the League of Minnesota Cities. These competing policy ideas, regulatory reform versus state subsidy, are likely to emerge as key issues as the commission continues its work leading up to the 2022 legislative session. For some legislative leaders, the track record of the subsidy approach over the past decades places it a lower priority as a means to address the housing crisis. “Some of the tools mentioned as a need for the league are already in place and have been used for decades, and with that we have a large deficit of inventory, we have some of the highest priced housing, if not the highest priced, in the Midwest, and then we have the racial disparity that is the worst in country,” stated Sen. Rich Draheim (R-Madison Lake). "We need to do things a little different.” In addition to the affordability and housing supply discussion, the commission spent time charting a course for the coming months. Sen. Kari Dziedzic (DFL-Minneapolis) and Nash were unanimously elected as co-chairs for the coming year. The commission plans to meet at least monthly through early 2022.

The final language of rent control questions in Minneapolis and St. Paul has been determined.

Minneapolis and St. Paul voters to determine fate of rent control policies After months of back and forth between activists, elected officials, constituents and more, the final language of rent control questions in Minnesota’s two largest cities has been determined. If a majority of Minneapolis voters check yes, the Minneapolis City Council would be granted the authority to enact rent control if they choose. In St. Paul, voters will have the actual rent control policy before them that would limit residential rent increases to no more than 3% in a 12-month period. This would be one of the most restrictive rent control policies enacted in the country. Currently, no other Minnesota cities have any form of rent control in place. The National Multi-Housing Council and the Minnesota Multi-Housing Association have announced strong opposition to the proposals along with the Minneapolis Area REALTORS® and St. Paul Area Association of REALTORS®.

In St. Paul, voters will decide on the adoption of one of the most restrictive rent control policies in the country.

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MARKET REPORT

Fed survey shows residential construction industry faces mounting challenges

Rising home prices continue to price out buyers in Minnesota

In the construction industry, project delays are persistent and mounting, and the number of challenges continue to grow, according to the most recent Construction Conditions Survey by the Federal Reserve Bank of Minneapolis. Survey respondents reported a slight overall increase in project cancellations compared with May levels, while project delays appear to be getting much more prob- Source: The Federal Reserve Bank of Minneapolis lematic. Nearly 60% of respondents cited an increase in project delays since May, with less than 20% citing a decrease. Residential firms reported increasing delays and modestly higher cancellation levels. Three big challenges rose to the top of the list for survey respondents. Supply chain problems (70%), labor constraints (64%) and material price increases (46%). Almost two-thirds of respondents said materials prices have risen by more than 10% over the last year, with 30% citing increases of more than 25%. Much of that increase is being passed on to the consumer. Fast-rising costs have had a domino effect over the entire industry. More than 90% of respondents said higher costs were leading to project delays, 70% said they hurt profits and 67% said they were dampening overall demand. Despite the growing challenges, survey respondents also reported that they remain mostly optimistic about the next six months. According to the Federal Reserve Bank of Minneapolis, some of this persistent optimism likely stems from the fact that many firms have work, as well as backlogs (which in some cases is a direct result of ongoing delays). While completing projects seems to be increasingly difficult for a variety of reasons, respondents’ optimism suggests it is better than the alternative.

Home prices across the state are still on the rise as the inventory of available homes struggles to keep pace with demand. Moreover, fierce competition among buyers, multiple-offer situations and other factors have further pushed prices to new heights. The median sales price in the Twin Cities was $350,000 in August, according to a report from the Minneapolis Area REALTORS® and the Saint Paul Area Association of REALTORS®. That is an 11.1% increase from last year and the third straight month of record-high prices. The average days a home spent on the market was down 43.6% in August to 22 days. Likewise, the state’s median home sale price saw an 11.3% year-over-year increase to $316,000, according to the Minnesota Realtors®. In August, the average days a listing remained on the market saw a 38.1% year-over-year decrease to 26 days. As the price of homes continues to rise throughout the metro and the state, potential buyers are being priced out of the already tight market. According to the National Association of

Home Builders (NAHB), the segment of new homes priced below $300,000 had fallen to 30% of all new homes nationally. This is compared to a year ago when the same unit made up 43% of the market. NAHB estimates that for every $1,000 a home price increases, 150,000 Americans across the country become priced out of that sale. In the past, many of the active buyers in the market were comprised of first-time homebuyers who typically vie for smaller homes at a lower price point. As prices continue to rise, this cohort of buyers is beginning to back out of the market, with August marking the first time since January 2019 that first-time homebuyers accounted for less than 30% of all buyers, according to the National Association of REALTORS®. The price of homes is expected to continue to rise until the market is supplied with these much-needed homes, especially at the lower price points. However, with challenges around labor, volatile material costs and regulatory roadblocks, building at an affordable price point is proving to be a tall undertaking.

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As the cost of lumber drops, other materials skyrocket Throughout the summer and into the fall, the price of lumber began to trend downward after a volatile year of climbing. The pressure on prices started with tariffs imposed on Canadian softwood lumber imports in 2018. When COVID-19 struck, several mills reduced production in anticipation of a slowdown, which never occurred. In fact, the opposite took place as demand grew throughout the pandemic. With demand rising, production stressed by COVID-19, tariffs impacting the market and trucking presenting a problem, the lumber market became extremely aggravated and prices skyrocketed to record highs. Earlier this year, the National Association of Home Builders (NAHB) estimated that these lumber price increases added an average of $24,000 to the price of a new home. Now, prices for softwood lumber are finally cooling off. However, even with down-trending prices, the cost remains above the pre-pandemic levels two years ago. This past spring, the price of lumber peaked at $1,600 per thousand board foot, on average. Now, the price is hovering around $400 per thousand board foot. While lumber has begun to moderate, most other items in the home production pipeline are rising. Sharp increases to other building materials are continuing to put a strain on the homebuilding process. The price of oriented strand board (OSB) has swelled 510% since January 2020. According to the Federal Reserve Bank of Minneapolis, over the last three months, the cost for materials like copper wire and structural steel are up 53% and 47%, respectively. As a result, there has been a slow down in homebuilding nationwide. Single-family starts were down 2.8% in August as builders struggled to secure materials. In the coming months, home prices are expected to continue to feel the pressure as builders juggle affordability with these material costs.

Source: NAHB

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MARKET REPORT

Housing market report

State of Minnesota

Twin Cities homebuilding slows in August as material costs increase

Moorhead

SOURCE: CITY OF MOORHEAD

24,833

Duluth

Year-to-Date Single-Family Construction Select Cities Through August 2021 SOURCE: U.S. CENSUS

SOURCE: U.S. CENSUS

St. Cloud

As builders work to supply the market with desperately needed new homes, the process is becoming increasingly more expensive. Increasing material prices, regulatory roadblocks and land supply are all making it harder for builders to provide homes at a price Minnesotans can afford. As a result, homebuilding slowed slightly in August. The Twin Cities metro area recorded a 4% year-over-year decrease in single-family permits in August.

SOURCE: CITY OF ST. CLOUD

Twin Cities

16,833

Mankato

129

SOURCE: U.S. CENSUS

Rochester

419

SOURCE: U.S. CENSUS

SOURCE: U.S. CENSUS. HOUSING FIRST MINNESOTA COLLECTED THE ABOVE PERMIT INFORMATION FROM AVAILABLE PUBLIC RESOURCES.

AUG. 2021

$350,000

$316,000

AUG. 2020

+11.1%

+11.3%

$315,000

AUG. 2020

$284,000

SOURCE: DEED

Y-Y Change

2020

$315,000

$284,000

Twin Cities Median Sales Price

Minnesota Median Sales Price

SOURCE: MINNEAPOLIS REALTORS®

SOURCE: MINNESOTA REALTORS®

Twin Cities Construction Employment Past 5 Months

United States

South - 88

West - 90

SOURCE: DEED

Midwest - 91

Northeast - 77

Regional Remodeling Market Indices, 2021 Q2 SOURCE: NAHB

The Overall Remodeling Market Index is calculated by averaging the Current Marketing Index and the Future Market Indicators Index. Any number over 50 indicates that more remodelers view remodeling market conditions as higher than the previous quarter. Results are seasonally adjusted.

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Minnesota Construction Employment Past 5 Months

HOUSING INDUSTRY NEWS

Employment Update Minnesota’s unemployment dropped to 3.8% in August, according to the Minnesota Department of Employment and Economic Development (DEED). This is compared to the July unemployment rate of 3.9%. The national unemployment rate also decreased from 5.4% in July to 5.2% in August. Construction in Minnesota recorded a 5.2% employment increase, or 7,022 jobs, since August 2020.

Twin Cities housing market eases up from the all-out frenzy Following an unprecedented increase in homebuyer activity in the second half of 2020, the Twin Cities housing market has moderated. Buyer activity this August resembled a more typical pre-pandemic summer month, compared to the frenzied buying spree seen over the last year, according to the Minneapolis Area REALTORS® (MAR). Pending sales in the Twin Cities fell 10.3% in August from the wild ride in 2020 but remain above 2019 levels. “Buyer activity was remarkably strong around this time last year,” said Tracy Baglio, president of the Saint Paul Area Association of REALTORS®. “It’s important to put softening sales figures in context. We’re returning to a more typical market in line with the past five years. Compared to the frenzied pace of summer 2020, that appears to be a slowdown, but it’s really just ‘normalization.’” With just 1.3 months’ supply of inventory, the Twin Cities housing market remains a sellers’ market. Historically, six months of supply is considered a balanced market. The median sales price in the Twin Cities remained at a record high of $350,000 for the third straight month. That’s an 11.1% increase compared to August 2020. Sellers are also receiving 102.4% of their list price, on average. “Lately, home prices have increased more than the ability of some buyers to afford them,” said Baglio.

According to MAR, the 6,525 signed purchase agreements in August represent an 8.7% increase from August 2019. While we may struggle to reach the same level of demand from 2020, this upward trend in demand over two years confirms that buyer interest and activity remain strong. “Year-over-year price growth peaked at +16.6% in May of this year. For August, the median home price rose 11.1%, still well above the historical average,” said David Arbit, director of research for MAR. “Price growth remains strong, albeit down slightly from May and June. We expect price growth to moderate and come back in line with

historical averages, but price softening is unlikely given the supply-demand imbalance.” With housing inventory in the Twin Cities down another 20% in August there is little hope that prices will come down from where they are. Nationwide, experts acknowledge that the key to prices dropping is a powerful increase in supply, which housing experts in Minnesota suggest is not possible at this time due to regulatory challenges and roadblocks to building affordable starter homes. “Compared to past Augusts, the percent of listings with price reductions is the lowest it’s been since 2003,” said Arbit.

Showing activity is also down compared to 2020’s frenzy of activity, but still above the more typical pace of 2019. “Showing activity has increased the most in the upper price ranges. While showing activity was down 3.4% overall compared to 2019, showings increased 75% on listings over $1 million,” said Arbit. Activity varied by area, price point and property type, according to MAR. Sales of condominiums were up 11.3% in Minneapolis and up 17.1% in St. Paul in August. Across the 16-county Twin Cities region, new construction sales fell 24.1% while previously owned sales rose 3.7%.

Source: Minneapolis Area REALTORS®

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INDUSTRY IN ACTION

The record-breaking fundraiser will help the Foundation create safe, dignified housing options in the community.

Gala raises new record to create more housing for homeless Minnesotans The Housing First Minnesota Foundation reached a new fundraising record during its annual Foundation Gala in August, raising over $400,000. The funds will go toward the Foundation’s work building and renovating housing for Minnesotans who are experiencing homelessness or at risk of becoming homeless. “We are just blown away by the housing industry's generosity,” said Paul Roecker, Housing First Minnesota Foundation

president. “Our community build projects have a lasting impact and create more safe and dignified housing options in our community.” The funds raised will help the Foundation break ground in October on its next project building more transitional housing for the Minnesota Assistance Council for Veterans in Minneapolis. The next annual Foundation Gala will take place in spring of 2022.

Real Estate Law at Every Level Larkin Hoffman has been a preeminent land use and real estate law firm for more than 60 years. The cost of developing new housing in Minnesota has sky-rocketed for a variety of reasons, but a big factor has been the refusal of cities to rein in their development fees and to be more supportive of “starter home” construction standards. We routinely advise clients on the best way forward when dealing with a city that refuses to adhere to legal requirements or are unwilling to consider modifications to their restrictive development standards to drive down the cost of new housing. We’d be please to consult with you on your next development.

Peter Coyle | pcoyle@larkinhoffman.com | 952-896-3214

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HOUSING INDUSTRY NEWS

INDUSTRY GIVES BACK

Project Build Minnesota launches Explorer Post to introduce more young people to the trades Attendees received safety training in the mobile safety trailer from The Builders Group and Associated Builders and Contractors.

Conference aims to help encourage construction careers The first-annual Construction Teachers Conference hosted by Project Build Minnesota brought together high school and post-secondary construction faculty in September for two days of education and site visits. The teachers heard an update on the state of the residential construction industry from James Vagle, vice president of advocacy for Housing First Minnesota; gained insight into changes in the Minnesota Residential Building Code from the Minnesota Department of Labor and Industry; received safety training in the mobile safety trailer from The Builders Group and Associated Builders and Contractors; obtained a labor market update from the Minnesota Department of Employment and Economic Development and toured a home under construction by John Kraemer & Sons, Inc. The goal of the conference is to allow Minnesota construction teachers to share ideas and network, as well as connect Minnesota construction trade instructors and their students with industry professionals so that all can gain a sense of the construction industry’s tremendous career opportunities.

In another effort to introduce young people to the opportunities in the construction industry, nonprofit Project Build Minnesota launched a Scouts Explorer Post focused on construction. The participants range in age from 14-21 and are getting an inside look at all aspects of construction. During their September meeting, the Project Build Minnesota Explorers group helped pour and shape concrete at D&S Concrete and Masonry. “The Explorer program has a long history of creating character-building experiences and mentorship that allow youth to achieve their full potential in both life and work,” said Dan Beaving, president of Project Build Minnesota and a project manager for Rice Companies in St. Cloud. “We’re excited to help expand the opportunities in the Explorer program to include valuable experience in the construction industry.” The Explorer Post is focused on providing hands-on experiences for the youth to help them understand the depth of the construction industry. Each month the Explorers will get to experience a new segment of the industry, including commercial construction, safety training, utility construction, electrical careers, landscaping and lumber careers. Learn more about the Explorer Post at projectbuildmn.org.

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INDUSTRY GIVES BACK

Industry connects on the golf course Several industry golf tournaments were held this August and September, allowing industry colleagues to connect on the course while supporting important causes. Housing First Minnesota held its annual Golf Open in early August at Majestic Oaks Golf Club in Ham Lake. Over 250 of its members came out to network and engage with the industry for the event, which supports the exceptional advocacy efforts of the association. The Housing First Minnesota Foundation, the nonprofit charitable arm of Housing First Minnesota, held its annual Building Futures Golf Classic in September at The Wilds Golf Course in Prior Lake. The charitable tournament raised nearly $30,000 that will help the Foundation build and remodel housing for homeless veterans and for women undergoing chemical dependency recovery. Project Build Minnesota also got in on the golf action this summer, hosting its second annual golf tournament at Willingers Golf Club in Northfield. Project Build raised over $15,000 at the tournament, which will help the organization continues in its efforts to attract young people to careers in construction.

The Building Futures Golf Classic raised nearly $30,000 that will help the Housing First Minnesota Foundation build and remodel housing for those in need in the community.

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Community celebrates Minneapolis apartment remodels for women in recovery The Housing First Minnesota Foundation celebrated the completion of six housing units for families in recovery in September. The apartment remodels were done as part of the Foundation’s latest Family Recovering Housing project benefitting Avivo. “The Housing First Minnesota Foundation is privileged to be able to use the

skills of our members and the housing industry to provide a better quality of living for these families in Avivo’s recovery programs,” said David Siegel, executive director of the Foundation. “This is one small undertaking we can do to help these women in recovery achieve their goals of lifelong wellness and success.” Avivo’s family recovery program allows

women to live with their children while undertaking the challenging task of recovering from chemical dependency. The Foundation had three build partners come forward to make this project possible. Two units were fully renovated by Plekkenpol Builders, two were fully renovated by The Kingdom Builders, and two units are now under renovation by John Kraemer & Sons, Inc. “This unique partnership brings together builders, trade partners, donors, volunteers and service providers who all share the goal of addressing homelessness,” said Paul Roecker, president of Housing First Minnesota Foundation and sales representative at Lyman Roofing and Siding. “It is truly an honor to help others achieve a better quality of living.” Quality housing is critical for mothers to focus on recovery, go back to school and find employment. Avivo specializes in serving individuals with the greatest barriers to success—homelessness, poverty, addiction and mental illness. With the completion of these six apartment units, the Foundation has now renovated 15 apartment units for families in Avivo’s recovery program.

Kelly Matter, president and CEO of Avivo, and Paul Roecker, president of Housing First Minnesota Foundation, cut the ribbon on the newly renovated apartment building in Minneapolis. With the completion of these six apartment units, the Foundation has now renovated 15 apartment units for families in Avivo’s recovery program.

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