Building in the Twin Cities: A Developer’s View
Rent control aside, Roers Cos.' Shane LaFave believes the metro area is still appealing. Here's where the company is focused.
The Twin Cities stand out as a stable and attractive area for both investors and developers, mainly due to the two cities’ steady economic growth and robust employment landscape. Most multifamily fundamentals continued to improve this year, despite the ongoing economic uncertainty. Development was the only area that slowed down, according to a recent Yardi Matrix report.
Rent control measures enacted in 2021 introduced a series of challenges that forced developers to move toward the suburbs, and sparked a lively debate about affordable housing in the region.
To understand local dynamics and the wide-ranging consequences of the new legislation, Multi-Housing News reached out to Twin Cities-based Roers Cos, a company that has been investing, developing, constructing and managing multifamily assets throughout the metro since 2012. Executive Vice President Shane LaFave oversees the development team from the initial conception of a project through the end of construction.
What makes the Minneapolis-St. Paul market unique and attractive for multifamily investors and developers?
LaFave: Minneapolis and St. Paul are attractive to investors and developers because of the area’s steady growth. The Twin Cities doesn’t experience the steeper highs and lows like some other markets, which is attractive to some investors. The Minneapolis-St. Paul metro area is also home to a number of large employers, has excellent employment data and the rent-to-income ratio is highly appealing compared to other major markets in the U.S.
We’re always going to have a strong presence in Minneapolis and St. Paul because our home office is located here, and we know the market very well.
How do you identify and evaluate potential multifamily development opportunities in the Twin Cities area?
LaFave: We identify our best projects from direct relationships with cities, land owners and local brokers. We make a strong effort to get to know the people in the areas where we want to develop because those relationships build trust and lead to opportunities.
There are a number of factors we look at in the Twin Cities and other areas when considering a project. We take into account the immediate surrounding area and what amenities it has for potential residents— such as grocery stores, restaurants, parks, trails, proximity to transportation—how many other multifamily projects are already in the area or in the works and the vacancy rates, rental rates, employment data and population trends. We also analyze the type and amount of housing needed in that area, and whether or not our projects would be received favorably.
Tell us more about the signature projects you recently completed. What makes them stand out?
LaFave: We completed Lexi Apartments in Blaine, Minn., last September, which was notable because it’s the fastest lease-up we’ve had since the industrywide and nationwide boom we experienced in 2021 and 2022. There’s plenty of data showing that lease-ups are slowing down in many areas across the country, so we’re proud to have reached stabilization there ahead of our proforma goals.
Another notable project is The Espen in Oakdale, Minn., which offers townhomes and apartments. The townhomes are open and offer premium rental housing for those who want a little more space but all the amenities of apartment living. It’s also our first project by our in-house general contracting group, so we’re really proud to have that first phase completed.
This spring we completed our fifth of five Twin Cities active 55+ communities under the Risor Residences brand. Risor of Blaine is loaded with amenities: a golf simulator, indoor pool, wine bar and much more. We hear from residents all the time about how much they love the features and finishes of their homes, and the activities and opportunities to build friendships with neighbors has clearly been the standout for them. It’s rewarding for our team to be able to offer rental housing that helps people create meaningful connections.
Do you have any projects or initiatives in the works that aim to provide housing solutions for vulnerable populations?
LaFave: About half of our development projects are affordable housing through the LIHTC program. Those projects generally provide housing for those who are at or below 60 percent of the area median income.
How has the introduction of rent control affected your projects and the overall housing supply in the area? What lessons could other cities learn from the Twin Cities’ experience with rent control?
LaFave: The rent control laws were not enacted in all cities in the metro area, so far it has just been in Minneapolis and St. Paul proper. What we have seen is that more developers seem to be carrying out their projects in the surrounding suburbs. The laws did not have a direct impact on our projects because we don’t have projects in those municipalities, but it has had an indirect impact in that it has created more competition amongst developers in the surrounding suburbs.
Recent data shows the number of multifamily permits in Minneapolis and St. Paul has dropped since rent control measures were introduced, with both cities falling behind the permitting activity in the suburbs. Rent control initiatives could have long-term negative impacts on new development, investment and maintenance of rental housing in our state’s two largest cities.
A lesson to be learned is that it is difficult to legislate a supply-and-demand-driven market. When rent control laws are put in place, it makes developers less likely to invest in that area, which leads to a supply constraint and then leads to increased demand for the existing supply, resulting in upward pressure on rents—the very thing the legislation was trying to avoid.
Expand on the balance between regulation and development in creating a healthy housing market. What’s your perspective?
LaFave: My perspective is generally to let the market balance itself out with supply and demand. Developers will naturally provide more of what is in demand, and when they supply too much of it, rents will level off on their own. If a city wants to encourage a certain type of housing, such as affordable housing, the best way to do it is by incentivizing developers with tax increment financing or other forms of incentive, as opposed to trying to control and limit the supply of the type of housing they want to discourage.
Affordable housing is a critical issue in many markets. How are you addressing the need for quality affordable housing in the Twin Cities and other supply-constrained markets that you’re active in?
LaFave: Last year alone, we closed on seven LIHTC projects that will provide 1,206 new homes in various markets. We agree with the economists who have concluded there is a shortage of affordable housing nationwide, but there is a limited pool of resources available from each state to build this type of housing.
We plan to continue to vigorously pursue those resources and keep building affordable housing around the country. Minnesota is one of the more difficult places to secure those resources as there are often three times as many applications as there are resources available, which underscores the importance of the program and the significant need for affordable housing.
READ ALSO: Can Design Really Reduce Affordable Housing Development Costs?
How does your integrated approach of in-house development, construction and property management benefit your projects and investors?
LaFave: Our vertical integration allows Roers Cos. to better control costs and timelines on our projects. It means our team is aligned from the very start, selecting sites in desirable locations and carefully evaluating them with our in-house experts on financing, construction, operations and leasing well before we break ground on a new multifamily project. There’s a feedback loop and knowledge accrued by having all of these capabilities in-house.
Adding our internal Roers General Contracting group in 2022 has been a game-changer for our ability to move forward with projects at a time when many developers are slowing down or stalled completely. Our vertical integration is key for moving our projects forward because of the cost savings it affords us in this economic environment of high inflation, high interest rates and constrained lender activity. Investors have expectations around what risks they’re willing to take, and we see our in-house capabilities as one of the ways we can help mitigate that risk for them.
What are your plans for the Twin Cities? Which upcoming projects are you particularly excited about?
LaFave: We plan to continue to do three to five projects a year in the Twin Cities. We are especially excited about our upcoming projects in downtown Chanhassen, Minn., and in Plymouth, Minn., on the former Prudential site.
We are proud to be part of transforming downtown Chanhassen with an exciting new development at the former Chanhassen Cinema and adjacent hotel. This project will feature 310 market-rate apartments and 10,000 square feet of retail space, offering a diverse array of dining options and popular national brands. With studio units as well as one- to three-bedroom units, residents will also enjoy premium amenities like a sun deck, fitness center, game room, coworking area and even a pet spa.
The Boulevard is a 75-acre redevelopment in Plymouth, right along Interstate 494 and Bass Lake Road. It is a true work-live-recreation destination and is planned to include multiple multifamily projects, retail establishments, grocery, employment centers, medical offices as well as park and recreation areas. It’s rare to have such a large infill suburban site available for redevelopment, and we’re excited about offering residents in the multifamily buildings so many features just outside their doors.
How do you expect the Twin Cities multifamily market to perform for the rest of the year and beyond?
LaFave: I think the second half will continue much like the first half. We’ll continue to see a tighter lending market leading to fewer deals happening than in previous years. Hopefully, toward the end of the year, we’ll start to see some interest rate relief, which would build momentum for 2025 and beyond.
