Minneapolis has seen an unusually high number of rental apartments converted to condominiums in the last few years. This has received considerable negative attention, since some tenants have been forced to move and some affordable rental units have been lost. But the conversions came at a time when they were desperately needed, and provided a near perfect remedy to market imbalances. A report prepared by a Minneapolis CPED intern identified 1,252 units converted from 2001 through 2005. As of the 2000 census, Minneapolis had a total of 168,624 households. The units converted amounted to less than three fourths of one percent of the households in the city. Although these are not huge numbers for a city of this size, it exceeds anything that we’ve seen before.
To understand why this sudden conversion boom occurred, one must understand the basic traits of markets. Markets are always in a state of change, and they are always seeking balance. In the case of the conversion boom, imbalances in both the housing rental and housing sales markets converged to create ideal conditions. The boom was a natural and needed free market response to the imbalances.
The rental market in the late 1990s and up through the first half of 2001 was tilted in favor of the landlords with low vacancy rates (under two percent) and rising rents. The market response to the situation was twofold. First, prospective tenants started to buy instead of rent, and second, new rental apartments were being constructed. A third factor, a recession, reduced rental demand further. These factors combined to quickly and significantly change the rental market. Vacancy rates rose to above seven percent in the metropolitan area and average rents leveled off. Landlords suddenly had difficulty finding tenants and had to reduce rents.
In the meantime, the rental market of the late 1990s and early 2000s was one of several contributing factors to a major boom in the housing sales market. But as the rental market was changing quickly in 2001, the housing sales market continued to boom in a high demand state until mid 2005. The supply of properties for sale in Minneapolis reached an extreme low of 271 units in February of 2001. There was a several year period where demand to purchase homes greatly exceeded supply, leading to rapidly rising prices. The average sale price in the city rose from $161,020 in August 2000 to $248,131 in August 2005. The supply/demand imbalance and soaring prices were threatening to make housing unaffordable for many families.
For the four years from late 2001 to mid 2005, the imbalances in the housing rental and sales markets created the ideal conditions for the condo conversion boom. An owner of rental units during this time found it very difficult to find good tenants, and as a result, the rents were in decline. But units for sale, including condominiums, were selling quickly, at rapidly rising prices. The markets created an opportunity, and practically demanded that the owner convert the units to condos. As a result, 1,252 rental units were converted to condos during this time. And these conversions were one of several factors that have helped to bring both markets back into a more balanced state. This has been beneficial to existing tenants, landlords, homebuyers, the neighborhoods, and the long term stability of the markets.
Of course the conversions have led to some problems, including tenants being forced to move, and the loss of some affordable units (283 of the 1252 units were previously affordable). These losses were significant to the people involved. But construction of new units is occurring. According to Minneapolis Multi Family Housing Development Reports, 5,255 units were developed and completed between 2004 and the first three quarters of 2006. Of these, 3,387 were below market, including 2,347 that were affordable for families under 30% median income. And since the markets have balanced, the conversion boom appears to be winding down. Units converted dropped from a peak of 756 in 2004 to 279 in 2005 and have continued to drop.
In summary, the condo conversions helped resolve serious housing problems facing Minneapolis. Homeownership ratios increased a full three percent in the Twin Cities (71.4% to 74.5%) from 2000 to 2005. This is a large and long term trend that affects Minneapolis significantly. The conversions helped to partly accommodate that trend. We should not be surprised and we should not fear the conversions. When markets are left alone and not manipulated by outside influences, they usually do what’s best for the majority of the participants and stakeholders.
Notes: This article was written in January 2007 and used in arguments against proposed restrictions on Condo Conversions in Minneapolis. There are strong arguments on both sides of this issue, and there continues to be shortages in rental and ownership housing opportunities for our lower income population. The Minneapolis City Council voted against the proposed restrictions. Data referenced in this article comes from GVA Marquette Advisors, City of Minneapolis, US Census Bureau, The Metropolitan Council, and Minneapolis Area Association of Realtors.
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