Construction began last year on North Loop Green, a mixed-use development on the edge of downtown Minneapolis. (ESG Architects/The Minnesota Star Tribune)

For homebuilders in the Twin Cities, 2021 was the busiest, though not the best, year in nearly two decades.

Last year homebuilders built nearly 7,400 single-family houses, outpacing the previous year by nearly 1,000 homes and the most since 2005, according to data compiled by the Keystone Report for Housing First Minnesota, a trade group that represents Twin Cities builders.

Builders were issued 7,811 permits to build 15,073 houses and apartments. Multifamily construction was down slightly compared with the previous year. During 2021 builders were issued enough permits to build 7,687 units, mostly market-rate rentals.

"The shortage of homes for sale in the Twin Cities and the demand for new housing has now reached a level that we have not seen before," said Todd Polifka, the 2021 president of Housing First Minnesota.

Despite deep demand for new housing, homebuilders faced a number of challenges during the year that caused delays in construction and steep price increases.

"The supply-and-demand problem, regulatory restrictions, labor shortage, lot shortage and supply-chain issues are adding up to a very challenging market for builders to overcome in order to meet the needs of our housing consumers," said Polifka.

Those challenges made it all the more difficult for homebuilders to make houses more affordable, especially for those buying their first home or downsizing.

At the end of November, the median sale price of a newly built home in the Twin Cities was $466,900, according to the Minneapolis Area Realtors, which only tracks sales of new homes that are listed through a real estate agent. That was a nearly 10% increase over last year at the same time and $112,000 more than the price of an existing single-family house.

"Given limited supply and strong demand in both new and resale homes, home prices rapidly increased, pricing out additional entry-level buyers with each uptick," said Danielle Leach, a vice president at Zonda, a national housing research company.

She said the onset of the pandemic caused unprecedented demand from entry-level as well as first-time move-up buyers in the Twin Cities. While builders pushed hard to get units started in 2021, labor and supply constraints caused a lag in closings.

Despite so many obstacles, residential construction in the Twin Cities far outpaced commercial construction. There is weakness in the office sector but growth in industrial construction, led by distribution centers and warehouses for Amazon and other large national companies.

Dodge Data and Analytics said recently that during the first 11 months of 2021 non-residential construction in the 13-county metro outpaced the previous year by only 9% compared with a 32% increase in residential construction, which was nearly even divided between single-family and multifamily.

Despite the strains of record lumber prices and a deepening labor shortage, developers broke ground last year on several sprawling projects that were years in the making.

That includes the Highland Bridge project in St. Paul, a 150-acre redevelopment of the former Ford plant along the Mississippi River, that has been in the planning process for about a decade. And in Minneapolis, developers broke ground on North Loop Green, a multiblock mixed-used project that will include two towers and 350,000 square feet of office space.

That project and several others helped make Minneapolis the busiest city for residential development in the metro. Developers planned to build nearly 2,700 new units — mostly rentals, more than twice as many as in Lakeville, which saw the second-highest number of units in the metro. For single-family construction, Lakeville, Woodbury and Cottage Grove were the top-three most active communities.

Leach said that with mortgage rates expected to increase to no more than 3.5% for a 30-year fixed-rate mortgage, she expects many of the same forces that shaped the market in 2021, including strong demand coupled with labor and supply constraints, to continue well into 2022.

"Demand from entry-level buyers remains," she said. "But there is very little inventory at their required, attainable price points."