Case Study: Multifamily Construction Defect Reform in Minnesota
As policymakers examine barriers to the construction of needed housing, they are increasingly looking at how existing laws are impacting the production of such housing. One of these topics is how multifamily construction defect reform can impact on the production of “for-ownership” housing vs. “for-rent” housing.
In 2017, the state of Minnesota overhauled its construction defect law with bipartisan support from its state Legislature. After the passage of the bill, Minnesota saw increases in multifamily production statewide and in Minneapolis-St. Paul MSA that far exceeded national averages and the increases observed are some of the highest in the nation:
- Comparing 2014 to 2018, Minnesota saw the 4th highest increase in multifamily units, up 92% the highest of any mid- to high-volume state.
- Comparing 2014 to 2018, Minneapolis-St. Paul saw the 3rd largest multifamily construction increase for MSAs with a population of 2.5 million or more, up 94.10% with the increase driven by projects with five or more units (up 95.18%).
From a high level, given the timing of the increase and law change, anecdotally and a quick look at the data indicates this law change led to an increase in multifamily projects. Examination of a limited data set on for-ownership production and interviews with townhome builders tells a different story.
- For multifamily projects, greater than five units, for-ownership production decreased after 2017 and became almost non-existent, despite the surge in multifamily construction.
- For townhomes, production increased, but that share of “for-ownership” and “for-rent” did not change in a meaningful way.
Interviews with townhome developers clarified the discrepancy. The law change, they said, was a partial measure that didn’t fully address the underlying concerns. The demand for townhomes, builders reported, grew from the affordability pressures in the Minneapolis-St. Paul area, with townhomes being essentially the only new-home product largely available to buyers for less than $400,000, according to one builder.
Given the length of Minnesota’s construction defect warranty period and the phased approach for homeowner’s association maintenance requirements, the full effects of this law may not be seen until 2027 or 2029. Until then, the lesson from Minnesota appears to be that leaving substantive issues on the legislative table minimizes the impact of the new law, keeping barriers to needed, for-ownership housing in place.