Race for affordable houses sends developers back out to the exurbs

In Dayton, developers propose building 1,700 new houses over the next 10 to 20 years, doubling the number that are now in the riverside town an hour northwest of downtown Minneapolis.

The stunning plan is one of several that have emerged in recent months to show how rising prices in the heart of the Twin Cities are pushing developers — and home buyers — back to the fringes of the metro region.

This shift comes a decade after the housing crash put the brakes on what had been a land grab. Homebuilding came to a standstill and land buyers put away their checkbooks. As the market recovered, developers concentrated on the urban core with a flurry of apartment building that remade downtown Minneapolis and St. Paul.

Now, there's a new generation of younger home buyers on the hunt. Demand for lower-priced houses, which are easier to build in outlying areas with lower costs for land, appears insatiable.

"We now have a market where there is demand in areas that had no demand even two or three years ago," said Jake Walesch, who is partnering with Dave Gonyea and Bill Ramsay on the project in Dayton. They have about 500 acres under contract.

Demand for inexpensive starter houses far exceeds supply in many parts of the metro area, so developers and homebuilders are scrambling to come up with ways to provide more economical options. The median sales price for a new house during October was $392,790, about $160,000 more than the price of an existing house, according to the Minneapolis Area Association of Realtors.

As a result, several developers have announced plans for sprawling subdivisions in outlying suburbs. In Rogers, Lennar proposed a 300-acre, 537-home development called Laurel Creek that would include entry-level row houses and quad-style townhouses that would start in the low- to mid-$200,000 range.

And in September, LGI Homes Inc., a Texas-based company that specializes in entry-level houses and a zero-down-payment mortgage, opened in the Twin Cities. It is selling houses in its Sanford Select Acres development in Big Lake starting at $230,000. The company is also developing a project in Montrose, which is nearly an hour west of the metro.

This swing of the pendulum for real estate developers isn't confined to the Twin Cities. Svenja Gudell, chief economist for Zillow, recently identified sprawl as a top trend for 2018. "Builders won't ignore this hungry market," she said.

"Suburban sprawl will return, the suburbs will expand as the cost of land and construction reaches a tipping point in urban areas," Gudell added. "We'll see the suburbs grow and expand outward."

Walesch said the project in Dayton will include a variety of housing types and prices ranging from about $300,000 to more than $800,000 that would be built by local, custom homebuilders. It's possible that a national homebuilder or two might tackle detached villa-style houses or townhouses, which tend to be less expensive than single-family houses because they take up less land.

Walesch said the immediate challenge for the developers is to find contractors who, with labor in short supply, can find enough workers to start on the first phases of construction.

The shortage may drive up labor expenses. Combined with fees and other construction costs, the planners will be challenged to offer new, detached single-family houses for less than $350,000.

And 90 percent of the proposed site, which is being called the North Dayton Development, is intended to be single-family detached houses or villas. The remainder will be used for attached housing, or apartments and condominiums, and retail.

The developers are working on an environmental assessment work sheet and hope to submit plans next summer.

"We have some ideas in early formation that will make this development exciting to the market and to the city," said Walesch.

He is also working on plans to develop about 550 lots in other outlying suburbs next year, including St. Michael and Lake Elmo. Walesch and Gonyea have developed a couple thousand lots over the past decade throughout the metro, and Ramsay has developed master-planned communities in Champlin and Brooklyn Park with more than 500 lots in each.

Tina Goodroad, the city development director for Dayton, said the project is by far the biggest ever for the city.

It will be the city's first master-plan project, she said, and an "opportunity to work closely with the developer to create a plan that provides unique neighborhoods with a wide variety of housing products and amenities," she said.

Documents already submitted to the city lay out plans for 1,500 to 1,700 single-family houses with a density average of about three homes per acre. In addition, about 28 acres would be devoted to mixed-use development.

Jim Buchta • 612-673-7376