Minneapolis Leads Nation in Falling Rents

According to the November rent report from Apartment List, rents in Minneapolis are falling faster than many peer cities nationally, including Miami, Denver, Chicago, Baltimore and Atlanta. Rents for a two bedroom apartment are down approximately ten percent compared to a year ago, and rents have fallen for each of the last seven months.

Falling rents are likely due to rising supply and falling demand.

Builders in Minneapolis are finishing large, new buildings and having difficulty filling them with new tenants due to the pandemic and government shutdowns that have accompanied it.

On the other hand, Pew Research finds big increases in the number of adult children living with their parents in 2020 relative to 2019, which is likely due at least in part to the business closures reducing opportunities for young people employed in the hospitality sector.

The interesting thing about the report is that it exposes one of the common myths believed by many Minnesotans, who tend to believe that Minnesota’s cost of living is about the same as the national average. In fact, many large cities nationwide have more affordable rents than Minneapolis, and as rents have fallen sharply in the City of Lakes, many other large cities have seen increases in the price of rental units.

Falling rents are obviously great if you’re looking for a place to rent, but the Minneapolis City Council should be concerned about the trend it falling rents are primarily due to dropping demand, rather than increasing supply.

Lower rents lead to lower valuations on properties, and lower valuations lead to fewer property taxes. Increasing the taxes to make up for lost revenue simply reduces the amount of money multi-family real-estate investors can expect to make on their investment, which causes them to put less value on assets located in Minneapolis relative to other locations.

It’s a small microcosm of John Phelan’s latest paper showing that growing the state’s GDP would yield more revenue for the state than simply raising the tax rate. Raise taxes too much and you increase the incentive for capital flight.