Agenda - Council - 08/27/2019 - Laserfiche WebLink

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Ms. Chloe McGuire Brigl City of Ramsey August 15, 2019 Page 2 • The Twin Cities has one of the lowest vacancy rates in the nation (sub 3% since 2011) which has been driving the demand for new construction. Although other major markets have been experiencing slower growth in 2019, the Twin Cities has attracted national interest and out-of-town investors are chasing apartment deals that have healthier returns than other larger urban areas. As a result, there has been capital investing into "value -add" older apartments as investors improve properties and increase the returns through higher rents. • New construction throughout the Twin Cities tends to be wood -frame construction with three to five stories above a podium of parking and/or ground floor retail. Stick -based con- struction in a mid -rise building is substantially less financially to develop than steel or con- crete and labor is more economical and available. Most densities in suburban communities in the Metro Area exceed about 25 to 30 units per acre and parking requirements are being decreased. New apartments are in an "amenities war" as each new property attempts to surpass the competition with the newest amenities that will lure tenants. • New construction has skewed to smaller unit sizes to address affordability and smaller household sizes. Many new apartment communities offer mostly studio and one -bedroom apartments and offer fewer larger units due to high costs and fewer larger households seek- ing rental housing. Larger units have appealed to families who are building new homes and need rental housing during construction; however, this market segment is low. Micro - apartments are also being developed in the core cities and near transit stops. These units are popular among Millennials who desire amenitized buildings but smaller unit sizes and more affordable rents. • Affordability continues to be a major obstacle as development has catered to the move -up and luxury sectors while demand is strong for the middle -market. As a result, most of the "affordable" rental housing is located in older, existing market rate buildings (Naturally Oc- curring Affordable Housing or NOAH) that has not been updated and rents are modest. In fact, about 70% of all affordable housing in the U.S. receives no government subsidies and is older market rate housing stock. However, there is a strong interest in retaining affordabil- ity in the older housing stock to keep rents in check with wage growth and inflation. Many cities are looking for funding solutions that allow these units to remain affordable. • The recent Tax Cuts and Jobs Act is the most significant tax law change in the U.S in over 30 years (since the Tax Reform of 1986). The tax reform negatively affected the for -sale hous- ing market for high-priced homes, second or vacation homes, and homes in high -tax states as the bill reduced tax benefits of owner -occupied homes. However, the reform was posi- tive for the rental real estate industry as landlords benefit from tax savings and modify the way "pass -through income" is taxed and renters benefit from the increased standard deduc- tion thereby increasing take-home pay. In addition, the tax cut fueled economic growth ini- tially and has prolonged the current real estate cycle as more entities pour money into real estate assets. The bill also preserved the 1031 tax -deferred exchanges and maintains its status quo for low income tax credit housing. MAXFIELD RESEARCH AND CONSULTING, LLC