When St. Paul’s rent control ballot measure passed in November, it contained a unique provision for national rent control policies: there was no exception for new housing construction. Typically, in order to make sure that new homes still get financed and built, rent control policies only apply to older apartments, either exempting buildings for a certain period of time or only including buildings built before a certain date. The policy laid out in the St. Paul referendum had no such exception.
With the passage of the rent control ordinance, there’s now a useful real-world experiment taking place. Was the conventional wisdom true that rent control would reduce housing construction, and if so, to what degree? Or is it possible to apply rent control to new housing without impacting the new apartments that cities like St. Paul need?
Building permits down over 80 percent
With three months of data on the books since the passage of the rent control measure in November, results are rather grim for anyone hoping for new apartment buildings in St. Paul. Compared to the same period during the previous year, multifamily building permits are down over 80 percent. Meanwhile, in Minneapolis overall construction is up as the economy has rebounded.
The data, compiled by the U.S. Department of Housing and Urban Development, is based on building permit applications which are tracked monthly by the U.S. Census Bureau. Overall in the U.S., 2022 is looking to be the largest year for apartment construction in almost a half-century.
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Multi-family building permits for Minneapolis and St. Paul, Nov–Jan 2020 vs. 2021
Six-month rolling average of new multi-family building permits, Minneapolis and St. Paul
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The struggle for project financing
If you ask people working in housing development, they blame St. Paul’s construction decline on the unavailability of financing for construction projects. For developers, there’s often a delicate tension with working with lenders, bankers and investors. New ideas like building housing without parking or without natural gas hookups, both of which are critical steps toward combating climate change, often require persuading reluctant lenders to take chances. The same conservative tendencies often apply for entire geographies, where lenders often refuse to finance projects in neighborhoods without any comparable investments. This can lead to decades without any new homes added to a community, as in this example from Minneapolis’ Seward neighborhood.
The problems faced by developers under St. Paul’s strict rent control policy are similar. Because people making financing decisions view rent inflexibility as increasing risk, they have been simply leaving St. Paul construction projects by the wayside. As one St. Paul developer described during a recent round table discussion, “it’s a concern.”
“We have two projects with 260 units where the capital stack was all put together and ready to go, but when the ordinance passed those investors went away,” explained Kou Vang, president of JB Vang Real Estate. “A lot of our investors were family funds, stuff of that nature, and they still went away.”
Exceptions and tweaks
Housing financing is so complicated that, apart from those working in the industry, few people grasp all the ins and outs. There are generally lots of ways to finance a construction project, ranging from simple to complex and national to hyper-local. Some developers like Seattle-based Weidner Apartment Homes, a key player in the massive Highland Bridge project, finance most projects using in-house capital. Others put together complex groups of individual and institutional investors into a “stack” or “vehicle” that then serves as the capital for apartment construction, which often involves at least one bank.
[image_credit]MinnPost photo by Bill Lindeke[/image_credit][image_caption]A vacant lot awaiting development on University Avenue.[/image_caption]
In the meantime, some planned projects are still going forward. In the case of the mixed-use development planned for Grand Avenue, the company working on the project has stated that they are going to have to set rents higher than they would have originally liked to compensate for the lack of future flexibility. Similarly, for projects like a recently pitched commercial-to-residential conversion in downtown St. Paul, the developer is requesting city subsidies to compensate for rent control restrictions, without which the project is likely to be stalled. Finally, most market-rate housing projects planned for the massive Highland Bridge development, where the city has already spent millions in tax-increment financing, are on pause for at least a year.
The Carter amendment
These kinds of problems are why St. Paul Mayor Melvin Carter pitched an amendment to the city’s rent control policy during his State of the City address last month. In his speech, Carter made the case for changing the ordinance language to ensure new housing can be built.
“Every single city that we can find with a rent stabilization policy in place provides an exemption to incentivize construction of new housing units, and so should St. Paul,” Mayor Carter said. “Simply put, we are in a housing crisis because we have more people than homes at every income level. And our population is growing fast. Anything we do to slow the production of new units will only make this problem worse.”
The Carter proposal would have a 15-year window for new construction or residential conversions. In the first year, that would apply to about 20 percent of the city’s 45,000 rented homes, though that number would fluctuate annually. Unlike California-style rent control policies, where new construction is pitted against older controlled apartments in a zero-sum fashion, the rolling window policy means that even brand-new apartment will eventually become rent controlled as they age, adding apartments to the city’s overall supply.
St. Paul’s lack of construction is a problem because both the city and the region are experiencing the consequences of a years-long housing shortage. In general, the region needs tens of thousands of new homes in order to meet the needs of a growing population, and to keep home prices and rents affordable for more people. St. Paul’s recent decline in new construction reverses what had been a promising trend, where the city was seeing record numbers of new apartments built over the last few years.
If placing bets, without an exemption, I’d guess that the decrease in St. Paul’s housing construction will only get worse. Housing developments typically take years to complete, and many of the projects that are still proceeding today were planned before rent control was on the ballot. For projects where developers are starting from scratch, it’ll likely be even harder to get financing or attract investment without significant city subsidies. But if an exemption passes, St. Paul should be poised to see a big housing construction rebound in a year or two.
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Rent control isn’t a development strategy, it’s about controlling rent, not building new stuff. If you want to evaluate the program why aren’t you telling us what’s happening to rent and existing rental property in the city? Beyond that… three months? Seriously we’re talking about three months AND rent control isn’t the only thing going on at the moment that affects new construction. The effects of this program will measured in years not weeks or months. Developers can build elsewhere but the question will be whether or not people who want to live in St. Paul will live in Orono instead? And you can build in MPLS instead but we’ll have to see how many renters will take on new higher rents. It’ll take more than three months to figure that out. Sure, builders are throwing their tantrum now, but whether or not the walk away from our capital city indefinitely remains to be seen.
Your comment is precisely why most / all rent control policies separate out the two very different problems of rents and construction with an excemption.
As for rent data? I’ll be sure to do that when information comes in. We didn’t even have access to fine-grained city-wide rental trends before this was passed on the ballot, but CURA is completing some data analysis right now for the Mayor’s Task Force. I hope they can finish that up soon.
As for your other points, my best guess: the best case scenario without an exception is that, even with the most benevolent bankers and investors possible at the table and interested in St. Paul, in a few (2-4?) years we’d be up to half of rate the housing construction that we were at before this policy went on the ballot. The worst case is worse.
Thank you Bill,
I’m sure we’re all well aware of the nature of your criticism and opposition to rent control. Some of have no doubt noticed that opponents of rent control are just a vehement regarding their opposition even if the new construction exemption isn’t included. Be that as it may the problem with your analysis is it relies on faulty economic assumptions.
No one has to do a deep dive into rental data to recognize the fact that we’ve had an affordable housing crises in this country for decades, you don’t need fine grained data to know that rents were increasing by double digits before the pandemic. These rent control proposals were voted into effect by a majority of citizens despite well financed opposition by bankers and developers. Let’s not pretend we didn’t see a problem and have to go looking for one now. Let’s not pretend that rent control was about solving some problem for bankers and developers. Obviously those who voted for rent control weren’t worried about bankers and developers, they were worried about their own rents. You can worry about bankers and developers but I suspect renters in St. Paul have noticed that their rents have stopped increasing by double digits, and no matter who builds what or doesn’t, those rents will remain capped THAT’S what they voted for.
As for the new development exemption, you’re referencing a circular argument. Your argument against rent control is that it doesn’t work, yet studies of rent control have revealed that one of the reasons it hasn’t been as effective as it could have been has been the exemptions you advocate. The new building exemption ends up bypassing rent control as mechanism for rent increases. You would build in exemptions that sabotage rent controls effectiveness and then accuse rent control of failing. This is flawed economic analysis. You keep ignoring the reason for this rent control design, or pretending there is/was no reason.
As for benevolent bankers and developers, the absence of such animals is responsible for the affordable housing crises to begin with. The vacuous assumption that those who created the the crises and profit from it the most are the ones who will solve the problem has been weighed, measured, and found lacking. Meanwhile I don’t know any serious person who would suggest that the last three months could actually predict the outcome over the next several years. This opposition to rent control is predictable, but the outcome remains to be seen.
Meanwhile rent control is working for renters in St. Paul, and it was never meant to work for developers and banks… let’s keep that in mind. The allegiance to developers and banks has been noted, organizing ones perspective around the best interests of bankers and developers rather than renters is a choice, not an objective economic perspective.
I’m not making an ideological argument about whether bankers or renters are good or bad people; that’s a whole different conversation. I’m making a practical argument and trying to focus on the big picture, not just rents. There are three key reasons I think it’s important to build (a lot of) market-rate housing in St. Paul:
1) housing affordability in general: making the housing shortage worse will mean that housing prices escalate more rapidly than they would otherwise, making the home ownership gap worse and pushing up prices for home ownership for working-class people to the point where it’ll be hard to find homes in the city
2) building new, energy-efficient housing near transit is a very important part of taking climate action; in fact, it’s one of the most important things we can do; I shouldn’t have to tell anyone that this is an urgent problem
3) development is critical for keeping the city’s tax base growing and funding social programs; this policy will mean that the city will have to begin to subsidize much more of any new housing, and any time we spend city dollars on 60% AMI housing (that would have been built ‘for free’), that’s less money for the 30% AMI homes we desperately need; this is not to mention other budget needs…
IMO the lack of a new construction exemption is the #1 problem with the ordinance that passed in November, and there’s a simple fix just sitting there, waiting for city leaders to act.
As for the rental data: I really wish we had some. Having arguments about this policy without it is like navigating blindfolded.
Thanks again Bill, I appreciate your response. Just a couple quick observations:
As for arguments about this policy… you wrote the article dude. 🙂
When I refer to faulty economic assumptions one the primary mistakes is revealed by your first complaint about new construction being the solution to affordable housing. This is a defunct supply/demand model that obviously doesn’t produce affordable housing, if it did we wouldn’t be looking at rent control in the first place. You guys keep saying build build build but no matter how much we build rents keep jumping and all you just keep saying build more.
You bundle up a lot of economic assumptions into a certain growth oriented model that assumes no one will want to live, work, or do business in a city with affordable housing. Again, the moneyed interests will certainly throw their tantrums and fits here but it’s unlikely they’ll walk away from the second most populated city in the State simply because residential rents are capped. You’re loading a whole lot of non-residential building and development into your projection here.
By the way, I’m not accusing anyone of being “evil”, I’m just observing the fact that landlords, banks, and developers aren’t the only interests in major city like St. Paul, the 300k people who live there play an important role as well, and their not all landlords and bankers.
Energy efficiency etc. is certainly a legitimate concern but you don’t really expect citizens and voters to make that a priority over their own rent do you? Most people will tell you that having an affordable roof over their heads is more important than taking climate action. And why assume that climate action is impossible in a city with affordable housing? These are NOT mutually exclusive projects.
Today’s housing crisis has a lot of causes, but I wouldn’t put greedy developers very high on the list, unless by “greedy developers” you are simply referring to capitalism in general. Why not single out greedy realtors or greedy people putting their homes on the market?
“You guys keep saying build build build but no matter how much we build rents keep jumping and all you just keep saying build more.” … There’s a lot of data packed into this kind of statement, and I’ve written a lot about it previously here and elsewhere. We’re not even close to building what we need in St. Paul or the metro. If you don’t agree that building more homes keeps housing costs lower, I don’t think we’re going to see eye-to-eye.
The vast majority of housing policy folks agree that building a lot of new housing is a necessary part of solving the housing crisis. If the market doesn’t do it, we need government to step in, and I don’t see that happening in any realistic political future. Building more homes isn’t the only thing we need to do (government needs to dramatically increase subsidies), but it has to be part of the solution.
Bill,
““You guys keep saying build build build but no matter how much we build rents keep jumping and all you just keep saying build more.” … There’s a lot of data packed into this kind of statement, and I’ve written a lot about it previously here and elsewhere. We’re not even close to building what we need in St. Paul or the metro. If you don’t agree that building more homes keeps housing costs lower, I don’t think we’re going to see eye-to-eye.”
Obviously you’re just circling back to the false claim that building keep prices low. You respond to my observation that all you keep doing is saying: “build more” by repeating the claim… that we need to build more. I’m classify this as a false claim because tens and tens of thousands of units have been build in one of the most sustained development booms of the last century, and despite ALL of that building prices have not been stabilized or kept low, they have in fact increased by historically record amounts. You’re claim that more building will lower prices is simply a fatuous claim, we know this because all of the building and development HAS NOT lowered or even stabilized prices. I can’t tell if you recognize this fact or not, but you ARE doubling down on an obviously false claim, and that IS and ideological position, not a fact based data driven prediction. The facts and data simply do not support your claim, and the fact that a lot of other people make the same claim doesn’t establish credibility.
Yes, we all know that housing prices are a complex issue, but I’m not actually blaming “greedy” developers and landlords entirely for affordable housing crises. YOU on the other hand keep repeating the claim that greedy landlords and developers ARE the solution to the crises. Not only do the actual facts and data refute this claim but the very logic behind the idea that this groups greed and pursuit of more profit will produce relief for renters lacks any serious credibility.
Luckily, I wrote about the massive shortage of new housing in the Twin Cities in this article, where I draw on Met Council data and other sources, like Governor Dayton’s housing task force: https://www.minnpost.com/cityscape/2021/10/why-twin-cities-housing-prices-might-see-some-major-increases-in-coming-years/ Our housing shortage is not nearly as bad as those in coastal metros, but it’s still the #1 reason why home prices keep rising, and rents along with them.
Saying “look there’s construction, so how come prices keep rising?” reminds me of the climate change skeptics who say “look it’s cold out in January, how can there be global warming?” We have to rely on data, not anecdotal observation, as a guide to really understand inherently regional problems like the housing crisis.
Thank you Bill,
Unfortunately your just using one specious argument to support another. I’m not going dive into this set of weeds suffice to say that housing prices aren’t a simply calculation derived from vacancy rates.
The difference between you and climate scientists is that climate scientist make accurate predictions and they can show us their models. You can complain about my question all you want, but unless you can predict when and by how much new construction will yield more affordable housing, or bring housing prices down and by how much… you can’t compare your model to climate (or any other) science.
Another problem with your vacancy rate model, is that to the extent it predicts higher prices, it cannot be an antidote to higher prices. Why do you assume that those who profit most from low vacancy rates would be motivated to raise vacancy rates? This blind spot is remarkably persistent. On one hand you’re telling us that bankers and builders analyze markets and make rational decisions in their own best interests… which is why they won’t build in St. Paul. But then you seem suggesting that in a city with no rent control these same actors will build recklessly until they raise vacancy rates to the point where they make less money. Your model is inherently paradoxical, the low vacancy rates that drive higher prices are themselves a deliberate product of the market, yet you keep claiming that the same market will reduce vacancy rates and lower prices? The reason you see this pattern nationwide is because builders and developers wherever they may be manage inventory to their advantage by manipulating vacancy rates as best they can. Do you honestly think the only thing a bank looks at when considering a building loan is whether or not the city has rent control?
“Your model is inherently paradoxical, the low vacancy rates that drive higher prices are themselves a deliberate product of the market, yet you keep claiming that the same market will reduce vacancy rates and lower prices?”
I’m sorry, I meant to say: “… the same market will raise vacancy rate and lower prices”.
Here’s just one of the many research papers that illustrate the link between increasing housing supply and affordability: https://research.upjohn.org/up_workingpapers/307/
Man, I don’t know if anyone is still following this but thanks for the link Mr. Lindeke.
“Here’s just one of the many research papers that illustrate the link between increasing housing supply and affordability:”
Unfortunately you’re damaging your own case with this citation, you’re still using specious arguments to support specious arguments. You can’t claim that this is: “just one of many” studies when your own author begins by saying:
“Increasing supply is frequently proposed as a solution to rising housing costs. However, there is little evidence on how new market-rate construction—which is typically expensive—affects the market for lower quality housing in the short run. ”
This is NOT a peer reviewed research document, it’s a working paper for an institute that has no apparent connection or expertise with housing economics or affordable housing research.
The most striking feature of this paper is that it “simulates” market effects of new construction… dude if this effect is the stable, predictable, and inevitable outcome you keep claiming it to be, no one would be generating “simulations”, they could just point to the actual effect itself… i.e. show us the affordable housing. Simulations are used to study effects that cannot be directly observed, but if THIS effect cannot be observed, you cannot keep claiming it’s existence.
This citation actually demonstrates my position that you don’t have any convincing evidence to support your claims, if you did you’d be able to show us something much more powerful than a “simulation”.
In reply here: Evan Mast is probably the leading researcher on this subject, and has published many peer-reviewed papers on the connection between construction and affordability. You’re welcome to come to your own conclusions by checking out his work. https://scholar.google.com/citations?user=yIvoJ7UAAAAJ&hl=en
I think there is a real disconnect in the renters vs developers idea. Creating affordable housing requires housing to actually be built and dense, multi-unit housing requires significant investment to build. If all incentives to invest in multi-unit housing are removed, or so restricted as to make no difference, no new housing will be built and that ends up helping nobody. It also seriously impacts the possibility of smaller 2-6 unit buildings ever replacing single-family homes. Those were already not very attractive to “developers” and the rent control measure made them pointless for a property smaller property owners to think about conversion or building on a double lot or as a replacement for a single-family home.
Blanket measures like what was passed in St. Paul also have the effect of reducing city revenue from people who can actually afford it. Renters of middle to upper-income levels benefit just as much (or more on a real dollar value) as a family in poverty because they are effectively protected from increases in property taxes. What that does is squeeze property owners of all income levels because the city has effectively eliminated any opportunity to get funding via rental properties of any rent level. Unless they are fine raising property taxes on rentals beyond the amount paid in rent at that property. It sounds crazy but there isn’t anything to stop it from happening. Insurance fraud will likely sound like a good option for owners at that point.
The measure is also going to significantly impact the quality of available rentals in the city, especially in older buildings. Maintenance will be deferred or eliminated wherever possible. When there happens to be an issue that is big enough to make the property no longer viable for rental, the owners will sell them as condos or the land for commercial development. This further reduces rental stock. I am also guessing that some of the rental developments currently underway are going to have very high rents when they first become available. Not exactly a recipe for more, high-quality, affordable housing.
I do find it funny that the two sides arguing about density and such at the old Ford site got a result they did. The side arguing for lower density lost the planning battle, then advocated against rent control, “lost” that vote as well, and now will end up getting lower density anyway. The circular firing squad approach to urban planning strikes again.
Dan,
“I think there is a real disconnect in the renters vs developers idea. Creating affordable housing requires housing to actually be built and dense, multi-unit housing requires significant investment to build. ”
Thanks Dan,
The disconnect between development and existing rental units isn’t my contrivance, it’s a real thing. Your model of building affordable housing only works if developers actually build affordable housing. You seem to assume there’s some unseen hand dictating what gets built when in fact banks and builders decide what to build… and they haven’t been building affordable housing for decades. Another defunct economic theory of development basically assumes that banks and developers are automatons who can’t control themselves and will build recklessly beyond saturation until their investments collapse under the weight of saturated markets- hence lower prices. That theory is obviously ridiculous, basically this theory tells us that the same people who are calculating their best interests when they decide not to build in St. Paul would otherwise be building recklessly in St. Paul were it not for rent control. In the real world bankers, developers, landlords, etc. seek to control inventory and keep prices as they can. Sure, markets collapse every now and then but that’s not an affordable housing strategy.
I don’t know why people keep assuming we’ll build our way into affordable housing when builders are refusing to build affordable housing, this is why they’re pulling their permits in St. Paul. We’ve seen this model doesn’t work, if it did we wouldn’t have a permanent affordable housing crises.
We also have to consider the fact that this isn’t all about new units, even if the new units were affordable, those who voted for rent control were voting to control the rent they’re already paying in existing housing, they weren’t voting to control rent in yet to be built apartments of the future. The problem rent control addresses is rent hikes in existing units here and now today. Promises to control rent with new buildings have put thousands of people out on the streets in the last decade or more.
Anyways, the complaints about building and rent locks here are ignoring the actual ordinance. Builders and landlords CAN get variances but they have to apply and fill out some paperwork. Builders can still build and landlords will still make a decent living, it’s just the nature of class warfare that those with the most advantages will fight to retain those advantages. This isn’t a revolution, it’s just rent control.
I never said that there was simply some invisible hand that would provide affordable housing and don’t believe that there can’t be policies put in place which would help create more of it. Therefore I’m not sure there is any value in responding to some of what you posted.
The truth is that housing defined as affordable is impossible to build. Material and labor costs to construct anything make it de facto unaffordable by any reasonable definition. This means I agree, we can’t simply expect to build our way to sufficient affordable housing. However, reducing supply will also have a negative impact on affordability. Especially if the restrictions being put into place are so tight they push owners of current rental properties to repurpose their properties (condos, commercial, etc).
Ideally, we could create a situation that encourages building more affordable units while providing more target support to those who need it. Sliding property tax scale for owners based on affordability of their units (down to 0% or even lower via credits for other properties) and direct financial support (that must be accepted by property owners) to people and families based on income. It isn’t as sexy as rent control but it is targeted at the problem versus the current program where wealthy renters are provided the same protections as those in poverty.
As unviable as this would be politically I would be very happy to apply property taxes to churches and private schools and apply those funds directly to affordable housing efforts. Maybe with some sort of credit given for their own verifiable efforts at providing affordable housing themselves. There are no reasons places like St. Thomas should be allowed to continually accumulate property wealth tax-free under the cover of “common good” while running what are basically businesses for middle and upper-income people.
The issue of variances being available is fairly meaningless since it simply isn’t predictable and there aren’t any guidelines or precedent that need to be followed. The idea that a property owner would be comfortable with the idea that the city “may” provide them an exemption at some point in the future simply isn’t compelling.
As I said in another post it’s not an issue of intent, it is an issue of the design of the ordinance. I have no desire to protect any particular return for developers or income level for landlords. But neither I nor you have the ability to compel housing out of thin air. I think that if we collectively, as a city, want to put resources into affordable housing we should do so openly and honestly rather than passing laws that simply compel others to do it at their expense.
Dan, the other irony surrounding the Ford Site outcome (so far) is that there were plenty of people and groups supporting more density at Ford, but also a rent control policy with no exception for new construction, which makes the dream of mixed-income density almost impossible.
I live fairly near the site and always found both sides on both topics off-putting. I don’t mind the density but was also underwhelmed by the design of the site and responses to concerns about how increased traffic would be handled. As with most big projects, it is a bit of a mixed bag and full of compromises.
I do think the design is the biggest issue at this point. I really don’t like how all of the dense multi-unit buildings are on the east side of the central park and the single-family homes are on the west side nearer the river. It feels segregated right out of the box. The aesthetics also feel like a lost opportunity in that they would be equally at home anyplace in the country and are more suburban than urban feeling.
When I was on the Planning Commission, we pushed hard to get more density along the river. But the developers really wanted single-family homes there, and got their way in the end.
How would this protect the working/middle class from property increases? Are you thinking it would be like CA? I don’t see that happening in MN and even if it did, that brings issues of its own. Intent and impact is my take away. Well written article.
Paul, respectfully, real estate investment (owning rental units, being a landlord) and real estate development are two separate businesses. Where they converge is supply. As developers build more of a certain type of buildings they increase supply and therefore put downward pressure on prices that owners of older buildings can theoretically charge. Now if development is adding new supply and aggregate rents across a variety of apartments are all still going up what you are seeing is demand still outpacing supply. That’s what’s been the case in the central cities and why there had been so much new construction in mpls and st paul. That’s why this part of this incredibly naive rent control ordinance in st paul is so damaging (to renters, but especially to the cities budget going forward).
Thank you, Chad. Let’s make this simple… show us all the affordable housing this system you describe is producing, or tell us when and where that affordable housing will come online. We’ve been waiting for over a decade thus far.
With respect, when I see “explanations” like this it’s hard to believe that you actually recognize that there IS an affordable housing crises. The scenario you describe would seem to guarantee affordable housing, yet we know it does not. If our housing is so affordable, why did so many people vote for rent control? And if the housing isn’t so affordable, why do you not recognize the error in your model? How is this not just doubling down on a failed model?
Paul, off the top of my head two ways from the supply side to create affordable housing are government built subsidized housing and the “drive till you qualify” conversion of cheap land (one of the main factors in housing costs being land acquisition). Both of these have been tried. Government housing obviously had numerous problems of which the concentration of poverty, and the costs of managing the properties exploding government budgets, were two of the many primary issues.
Developing cheap land on the periphery of the metro also had the problems of environmental degradation of sprawl as well as burdening low income residents with unsustainable transportation costs. Suffice to say this is a problem without easy solutions.
Perhaps a different approach that deals with increasing income or subsidies for housing are better approaches. Obviously we have programs that sort of deal with these approaches in welfare and housing vouchers (section 8, etc). I’d certainly support more targeted approaches that enhance these types of efforts to help make housing more affordable.
But rent control, especially within an individual city which exists in a large metropolitan area is not a solution to making housing affordable that has, or will work. And people vote for many things and politicians (tens of millions just voted for Trump AFTER witnessing 4 years of general incompetence) so I’m not sure I put much stock in the collective logic of the voters all the time.
St Paul is not a “rich” city as far as its ability to raise taxes and also deliver a high level of services for its residents. Various reasons for that, but suffice to say the immediate decline in the construction of new, denser housing which was attributable 100% to this ordinance is going to seriously exacerbate the ability to continue to deliver services at a level people want. As far as the equitable service delivery is concerned I will not be surprised to see school funding struggle, crime and safety struggle, infrastructure funding struggle (roads ain’t great already and poorer people needing car repairs from potholes is not an imagined problem). On top of this, the wealthy area’s of st paul have limits to how high of a tax burden that’s sustainable until Highland, Mac Groveland, etc start to lose residents to Woodbury, Eagan, Mendota Heights, etc.
This is why the recent trends of developers doing business in st paul, after decades of stagnation, was such a positive development. That is all currently stopped and it stopped because of this ordinance full stop. Demand to live in st paul didn’t go away, supply was unnaturally constrained. And people, notably Mr Lindeke, warned about this and were unfairly attacked in the comments and an insane guest letter here on minnpost. I don’t doubt the good intentions of the supporters of the rent control ordinance, it’s quite clear they were trying to address the housing affordability issue. But their solution is actively making the problems worse. St Paul isn’t a city that can afford to be the site of an ideological battle, but here we are. Solutions to housing affordability are necessarily the realm of state (federal government really) that have the means to help. And also the jurisdiction of entire metro areas.
Developers may have taken a step back in St. Paul, but I suspect that’s a temporary step. The factors that drove them to St. Paul in the first place are present. The idea that rent control is some kind of silver bullet that will kill ALL development of any kind for any reason is obviously specious don’t you think?
I am a small landlord in St. Paul. The rent control is the final nail in the coffin. The overall attitude by the majority of voters in the city and the majority of its elected officials is that landlords are greedy and exploit their tenants. This is offensive to me personally. Given that attitude, I will NEVER invest another dime in St. Paul real estate, no matter what happens with the rent control ordinance.
There are lots of other communities in the metro area who appreciate our capitalist system and welcome private investment. There is no need to beat my head against the wall in St. Paul.
I wish you the Best wherever you go Mr. Schumann, but renters everywhere pretty much share the same attitudes, they just don’t all get a chance to vote for rent control. You can find a city that doesn’t have rent control, but that doesn’t mean you’ve found a city that loves you. Anyways, I think your exaggerating the level of hostility in St. Paul and if you don’t want to collect rent there I’m sure someone else will.
Granted the timeliness has been very short, but given the comparison to Minneapolis, even the most myopic ideologue should be given pause in the drastic drop un permits. To accuse developers of having a tantrum when they can’t secure financing is a trump level attack.
Let’s not bring the world’s worst real estate developer (Trump) into this please…
I wonder a little about whether a 15 year rolling exemption is long enough. My understanding is that the standard in other cities is 20 or 30 years. But I suspect it’s not a big issue, since rents and tenancy in a building tend to stabilize over time, certainly within that 15 year window.
Why would anyone want to invest in building rental housing in a city where the majority of the voters and the elected politicians think that landlords are evil and unfairly exploit their tenants? There are a lot of other communities that welcome these kinds of investments where landlords aren’t treated like the enemy.
Provide proof of your claims or don’t make them. Short of a poll asking people explaining their votes, there is no evidence why people voted.
There is, however, evidence to support the theory that tenants came out in far larger numbers than property owners in order to vote for a measure that promised them relief but ignored the interests of others, including those in the business of renting residential property.
A quick survey of reasons and warnings for voting against the St. Paul Rent Control policy are an example of prophecy being fulfilled.
I heard today about a possible workaround for landlords: change lease language so that heat and/or other utilities are no longer part of the base rent.
I’m curious to see what my landlord does with lease terms this summer, when my current lease expires.
P.S. Thanks, Bill, for another interesting article!
It’s already begun. I’ve been helping a family member find a place to rent. It is not uncommon today to find a St. Paul landlord requiring tenants to pay for trash collection and other charges easily segregated from monthly operating expenses. Some even charge more than the rates set by the City under the trash collection ordinance.
Landlords will quickly realize when it is worth putting utility meters in for each unit but it could be very expensive in older buildings where one boiler heats every unit. But, given no ability to pass off increased energy and utility costs through rent I am sure they will find a way. Renters will save $50/mo on rent increases to end up with $150/mo or more in new utility costs.
I’m confused, this was a thing? When last I was a renter, about 20 years ago or so, the ONLY utility I didn’t pay was heat.
Heat can be a significant expense. Shifting it from the owner to the renter could easily offset any potential cost containment due to rent control. Some newer apartments have included internet and other things as well.
Considering in most apartments I lived in we literally turned the individual unit thermostat off due to the building being so warm, I think it might be less simple than it seems. As for anything else included, I guess that must be a more recent development, that may be limited to the higher end of the market anyway.
When wages go up landlords use it as an excuse to raise rents proportionally putting us right back to where we were.
We need to mandate that rental units of 300 square feet or less cannot rent for more that 40 hours net at minimum wage this will enable everybody to afford a place to live.
A cap of +25% should allow for people to transition to market rate housing.
Each year the landlord may request a W2 to verify eligibility.
This would also benefit fixed income retirees and the disabled.
Further making it mandatory that future construction of apartment buildings must each have a number of these units directed by the local permitting authority.
Thus insuring availability and allowing for growth of the community.
This is such an own goal by the voters of St. Paul it’s pathetic. I keep wondering how difficult it would be to overturn this debacle. We need more housing now.
Funny, they were told this would happen if it passed and OMG, it passed! And it happened! Imagine that!
Economics 101 wins over happy thoughts, again.
It’s a rare day when Mr. Lindeke and I see eye to eye, a fact that no doubt causes him an endless loss of sleep. But here we do.
Whether one likes it or not, capital flows where it can earn an optimal return on an investment. What is optimal depends largely on the level of risk assumed in making the investment. The current ordinance enhances the risk of investing in residential rental property in St. Paul in many ways. First, as we see today, inflation is an ever-present force, one that can very quickly erode the value of the dollar. That erosion effectively reduces one’s return on an investment, just as if one had placed the funds in a certificate of deposit or purchased an annuity. Another risk factor, as alluded to by another person in this thread, is that once the regulatory dam is breached, as it has been in St. Paul, one can never know what might come next. (The St. Paul Tenant Protection Ordinance struck down in federal court is an example. Press reports indicate it is again being considered by the City, with whatever changes may be needed to pass Constitutional muster.) Third, no one knows what impact the ordinance will have on rental property values, though I suspect it will act to reduce them. (One of the three ways to assess property value is the income it produces. When that income is limited in unpredictable ways, buyers will seek a lower price to offset that uncertainty.)
There undoubtedly are many other factors that come into play for developers, lenders, and owners. It’s unfortunate that they did not have (or take) a seat at the table when this draconian ordinance was written. A workable plan might have emerged.
One last comment, for those who claim rent increases were out of control: The ordinance itself set a 3% cap on increases on the grounds that this was the average rental increase in Minneapolis over a 20 year span. If so, why was this ordinance necessary? Where is the data to support a claim that average rental increases for any segment of the tenant population exceeded 3% in that same time period and in which segments that occurred? Why does the ordinance extend to all rental properties, at all price ranges?
Finally, a question: does the ordinance apply to a person who rents out a room in their home?
Mr. Hamilton, all of your questions were asked and answered before the vote. You can find those discussions I’m sure. Suffice to say if 3% caps have no practical effect no one would have spent something like $3 million to defeat these initiatives. Obviously there was rationale for the caps, and obviously those caps were opposed.
I just have to say that I think it’s interesting that so many commenters here seem to assume that the welfare of the landlords is the only legitimate concern, and that the “crises” here is some kind of landlord hardship. I would point to the fact that in all these discussions over the years and throughout this debate no one has presented any data or information indicating that landlords aren’t making enough money from their properties. There just seems to be an assumption that limiting their ability to jack up rents will inflict hardship. I’m sure THEY will tell you how much this hurts, and the tales of woe will be thick and heavy… but they won’t show us their books. The ability to raise rents stemmed from an imbalance of economic power that rent control seeks to address.
I have heard tell of landlords adding various utility charges to rents, such as parking garage, common areas, and other mechanisms lately. I’ve wondered if these were actually hidden rent increases and otherwise attempts to get around the rent caps. I’m not sure how legal these things are, even if they’re hidden in the bowels of the rental agreements somewhere but I suspect this will trigger a response from renters so I’m not sure it’s a smart move for landlords.
Paul, a lot is are concerned about having affordable housing for citizens, as well as a growing tax base to provide services to citizens. Plenty of us see this rent control scheme as detrimental to those goals.
Thank you Frank, I’m not challenging anyone’s sincerity, I’m challenging the rationale. I would remind you that these initiatives both passed by popular vote, obviously a large number of people would disagree with you. And I would remind you that you (not you personally but “you” figuratively) have had decades to sort this out… it’s just matter of time before someone else gets a crack at the problem and those who fail can only claim expertise for so long.
Exactly this. The trouble with some rent control proponents is that they paint anyone who opposed the measure as being pro-developer and anti-renter. It is the Trump argument style “If you don’t support the wall you must be anti-American” and the trouble is it works in moving voters.
The truth is the measure will hurt renters and not help and it isn’t a failure of intent, it is a failure of design.
Dan, if you want a less contentious discussion I suggest you talk the guys who spent 3 million dollars trying to defeat rent control. It’s a little disingenuous to prioritize the best interests of landlords and developers and then whine about polarization when renters ask to heard as well. You’re characterizing an attempt to balance interests as conflict of interests and placing the burden of the conflict upon renters.
The fact that simply recognizing the legitimate stake that renters have in this scenario is characterized as an: “attack” on developers and bankers simply reflects a position of entitlement and privilege. The fact these are competing interests is obvious, and the suggestion that EVERYONE wants the same thing here simply ignores market realities under the pretense of markets expertise. Renters want lower or stable rent, landlords want higher rents… how is that NOT obvious? This doesn’t make anyone enemies but let’s not pretend that developers are benevolent agents working on behalf of renters.
Be all that as it may, for my part I’m not actually attacking anyone or even demonizing anyone. I’m just recognizing the obvious paradox of assuming that those trying to make as much money as they can will produce the best possible outcome for their “customers”. I happen to have to have noticed that there’s actually no such thing as “magic”, which explains why the magic of the markets have failed to produce affordable housing. The promise of letting landlords charge whatever or as much as they want and pretending that developers will inadvertently build more housing than we need to the point where housing prices will come down is magical thinking that has completely failed to manifest affordable housing. Meanwhile, for the first time in decades renters in St. Paul will not see rent increases greater than 3% this year (or next depending how you want project it). Decades of failed free market magical thinking erased by one vote for rent control… done. Ya’ll had decades to produce affordable housing and all you did was fight rent control. So be it.
Competition is the basis of capitalist economies, everyone seeks their own best interests. The notion that landlords, developers, and bankers represent EVERYONE’S best interests is naive and possibly even a little obtuse. If you don’t want to see competition between renters and landlords show us your new economic system.
Yes, developers and landlords want the benefits of higher rents while renters want rents to be lower. Also, I agree no one’s intentions can be viewed as altruistic. Nobody here that I have seen (and specifically not me) have claimed that landlords have renters’ best interest at heart or made an effort to argue for the interests of developers or landlords. We are just honestly acknowledging the effects the ordinance will have when combined with the aforementioned landscape of self-interest. Continuing to frame anyone who doesn’t share your opinion as siding with landlords and developers is very disingenuous. You seem to stay with that tack rather than addressing any of the very real points made regarding the impact the policy is having currently or likely to have in the future. You also seem to start with the premise that the burden to provide affordable housing is solely that of developers and landlords and not that of the city collectively.
The idea that ” Ya’ll had decades to produce affordable housing and all you did was fight rent control.” is also disingenuous and does nothing to counter the fact that the policy is likely to hurt renters more than help. Who is “Ya’ll” anyway and why is it their responsibility to provide you with the outcomes you desire? Same for any idea that “Suffice to say if 3% caps have no practical effect no one would have spent something like $3 million to defeat these initiatives. Obviously, there was rationale for the caps, and obviously, those caps were opposed.” says nothing about whether the rationale was well thought through or if the policy will have a positive effect. Just because landlords and/or developers opposed it doesn’t mean it is a good policy. It is the same type of discussion I had on another thread where somebody claimed they won’t believe anything if all Democrats believe it. It simply isn’t a rational way of processing information. These are purely reactionary arguments without real any foundation.
I would have hoped that what has happened over the last 6 years in this country (and the abhorrent legislation currently being passed in places like Florida, Texas, and Idaho) would have made it clear how dangerous populism is. The burden is, as it should be, on the people who want to pass legislation compelling others to act in a certain way. The St. Paul rent control policy is very much populist in nature.
Just think about this thread and the time and words wasted arguing intent rather than effect. All could be avoided with a few simple questions upfront. Do we believe that we, as a city, have the responsibility to provide affordable housing (as defined as….) and that the market on its own has not done so? YES. Do we acknowledge this will come with a cost attached? YES. Do we understand that we, as a city, must share those costs based on each member’s ability to do so? YES. I agree with all of those and assume you do as well. From there it could actually be a discussion of merit with potential results. But populist shouting matches are truly pointless whether they are with people on the left or on the right.
The problem with that mindset is that we have those decades of inaction to show us what it leads to. I liken it to the police reform issue that I’m sure everyone is tired of me railing about. How can anyone believe that the argument against rent control is in good faith when we’ve seen decades of inaction on affordable housing. Why should there be any assumption that there will be change when the same people who argue against rent control cannot point to any changes that have been proven to alleviate the housing problem in any acceptable timeframe, and instead spend most of their time detailing how and why really any sort of policy won’t work. The populist sentiment exists because traditional policy decisions haven’t worked, and because people aren’t stupid enough to think that continuing to try similar approaches is gonna positively affect their personal situation. What you seem to suggest is that folks having housing challenges should just accept their fate, and quit complaining. I’m not sure that’s gonna be the most persuasive argument.
Conflating “New ideas like building housing without parking or without natural gas hookups, both of which are critical steps toward combating climate change” is not accurate.
Eliminating natural gas, and going all-electric, does in fact combat climate change. Eliminating parking does not. With or without on-site parking, people will own cars. Instead of parking them in garages, carports, parking structures, or parking lots, they will park their cars on the street. Public streets should have bike lanes and not be used as public parking lots. Furthermore, when a new development includes parking, it can provide electric car charging stations.
That is absolutely not true. If you make parking free for people, they are much more likely to own a vehicle. A structured parking spot costs something like $25,000 to construct, and adds a lot of housing cost for people. Especially near transit, having the option to live in an apartment without a parking space is a huge step forward to combating greenhouse gas pollution.
Now you’re attacking cars? I hate to say it Bill but for an “urban” guy you sure seem dedicated to making urban life for renters as difficult as possible… high rents and no parking? Sheesh. 🙂
Bill, what is your take on the impact electric cars can or should have? Specifically when it comes to rentals and parking. While they are by no means without their issues (mining for battery materials, etc.) they do seem to be a much better option than internal combustion. I have no desire to keep parking requirements for businesses or apartments but I am also wary of shutting renters out of the electric car market because they can’t charge when at home.
Financially and environmentally, not having a car is far better than having an EV. We should have lots of options of where and how to live, including buildings and apartments where parking is not needed and not part of the housing package. Nobody is stopping developers from building structured parking a la carte (yet), so I am sure the folks who build and market new apartments will include that as an option for those who want it. The maddening thing is when governments require new housing to include parking as a matter of course. In an era where we need urgent climate action, that’s lunacy.
I agree that forcing people to build parking is crazy. However, not putting up barriers to replace ICE with electric simply because somebody rents their home is also an issue. Europe (not that is the end all be all measuring stick) passenger cars represent over 70% of passenger miles vs 17% for mass transit. Significantly reducing the environmental impact of that 70% is an important part of the equation. In the United States that is even more the case since our passenger mile breakdown is well above 90% by passenger car I believe.
Pushing up the percentage of miles taken via mass transit is very hard to do. Especially because it is very expensive and will take decades at best. I simply don’t believe it is politically or practically viable, especially in a political landscape where we are fighting for the basic underpinnings of liberal democracy. As an example, If 10% of the SW line budget had been spent on universally accessible charging stations we could have built around 1000 8-10 spot stations around the state basically freeing everyone from dependency on fossil fuels for transportation. That is far more impact, for far less money, than light-rail. Especially since it isn’t relegated to the few people near one linear strip of ground.
Well I recently wrote a column on just this problem. Doubling transit ridership in the Twin Cities is an achievable goal, if the state would fund it: https://www.minnpost.com/cityscape/2021/12/public-transit-use-needs-to-double-in-the-next-decade-to-fight-climate-change-in-the-twin-cities-that-will-be-hard/
I just have to say that the REAL false dichotomy here is the constant and baseless assertion that we can’t have affordable housing AND development, or climate action, or sustainability. Clearly the base assumption here is that rent control threatens the very nature of society and economic growth or sustainability. My point to make a long story short is that this assumption is economic garbage. There is no inherent conflict between affordable housing and sustainable communities, ecologies, and economies, this is a contrived conflict that seeks to preserve a status quo that serves existing power. It’s no wonder that this predominant narrative/model has produced an intractable housing affordable housing crises; despite claims to the contrary, the belief that affordable housing is incompatible with economic growth could never yield affordable housing. You can’t permanently tilt the scales towards one interest and expect that will benefit other interests.
In fact affordable housing is an essential feature of sustainability, livability, and economics. Some of us are old to remember times when housing was actually affordable and the economy was robust and productive, I myself have lived in such times. The idea that rent control makes building, climate action, etc. etc. impossible in St. Paul is simply fatuous. Those who attack rent control claim to care about affordable housing but fail to recognize how essential it actually is… they think it’s a byproduct of development rather than social and economic necessity.
We see here and everywhere for instance all of the complaints about the drag on development rent control may inflict, but absolutely NO discussion regarding the economic drag that unaffordable housing IS inflicting every day, week, and year. The economic benefits of affordable housing and rent control are simply dismissed and ignored behind the smoke and mirrors and magical thinking.
Lindeke’s assumption that his grand vision of a better future is incompatible with affordable housing and rent control is simply mistaken. In fact affordable housing is essential for his grand vision, so long as so many people are fighting to keep a roof over their heads Lindeke’s projects won’t get the attention he needs and wants. Effective rent control get us into affordable housing almost immediately rather then waiting for magic to happen. Since the application of rent control to new housing makes that rent control more effective, and since variances and exceptions are built into the regime, I think Lindeke and others should be figuring out how to work with rent control rather than repeal it… THAT’S the real path towards sustainability. You will note that the only people promoting conflict here will be those who fight to repeal rent control. Everyone else is just tying to go about their daily lives with a roof over their heads.
Newsflash, owners of rental property will go to where they can get the best return on their investment.
Newsflash… renters will go where they can to find affordable rent. And it’s a lot easer to move a sofa than it as building.
I don’t want to continue a circular dialogue indefinitely so I’ll sign off for the most part, but I want to make couple last observations.
First, from Dan’s comment above: “The truth is that housing defined as affordable is impossible to build.” Thank you Dan, finally someone admitted the truth around here. This assumption that affordable housing is simply not buildable is the REAL foundation of this attack on rent control and Lindeke’s complaints. However, we understand that you cannot declare that affordable housing is impossible AND promise that building new housing WILL provide affordable housing at the same time right? You can’t claim to be solving a problem you don’t actually believe exists or can be resolved. You can’t claim the the issue of more affordable rent is inconsequential and promise to provide rent relief at the same time. This is why these constant claims that continued building resolves the crises are a sham pretending to be economic wisdom. This is why claims that development and building are more effective means of controlling rent than rent control are fatuous claims.
While some around here may think affordable housing should be in “quotes” clearly the majority of voters in MPLS and St. Paul disagree. Obviously a majority of people do not think this is an inconsequential issue, and I would say in fact, housing is not a “choice”, it’s a human necessity. When teenager die of asthma attacks in tents along Hiawatha Ave. I don’t think we need to discuss the merits of housing vs. electric busses… but maybe that’s just me?
Be all this as it may I just say despite my obvious sympathies for renters I don’t actually mean to attack developers, banks, or landlords. I’m not classifying any of these people as “evil”, I’m simply acknowledging the obvious nature of some competing interests. I don’t mean to imply or suggest that one side or the other is deliberately inflicting harm on the other, but depending on the scenario one group benefits more from a status quo than the other, and sometime a status quo can be oppressive even the absence of deliberate oppressors.
Meanwhile let’s note that tens of thousands of renters now having a pathway towards more affordable rent for the first time in decades and predictable and affordable increases, (especially NOW) delivers substantial economic benefits to a city and a community. It would be nice if someone at Minnpost were to write an article about the benefits of housing security and predictable rents and increases for tens of thousands of residents. We will no doubt see more article bemoaning the effects of rent control on landlords, banks, and builders, but the benefits of predictable expenses and housing costs across a wide spectrum of economic concerns and indicators have also been well documented, let’s hope someone writes that up for us. Obviously the suggestion that rent control in and of itself will kill any attempts at any other types of community development or sustainability are quite suspect.
Paul, you don’t have to move the building, you sell it and buy in a more attractive neighborhood. If you have held on to your building for 7-10 years, you’ve been able to pay off building and can afford to sell.. Having had multiple duplexes for decades, moving is necessary and you go to were you can maximize investment. Bring the sofa is not necessary.
Joe, people who buy apartment buildings continue to rent out the apartments.
I’m going to call Bill out on this one because he’s applying cause and effect without actually providing all the variables. And he should know better.
I think there’s a lot more at work here than rent control. Minneapolis and St. Paul are too close together to see this as being about rent control. That is, when financing is equally available, it will go to the least risky investment. Given that materials and inflation are high right now, there’s a particularly high pressure on financing. And, because for nearly every intent and purpose, Minneapolis as a direct replacement for St. Paul, the path of least risk is to just shift a little to the west if more money can potentially be made there. That is, the impact of rent control is extremely exaggerated right now. In a normal year, that impact would be much, much less (and maybe too small to measure). And if Minneapolis also had rent control, I bet that both cities would actually see an increase in devel0pment because it would even out (or maybe shift *slightly* to near-in suburbs…but not a lot because the infrastructure for easy transportation sucks).
The other thing is that I bet that, despite the sudden drop in new permits, there will be little to no impact on affordable housing over any measurable timeline because there has been no downward pressure on rents regardless of how much new development there’s been in the last many decades here. We live in one of the lowest rent areas (per average income) in the nation. The average rent is about 22-24% of income here, with St. Paul being the more affordable city in 2021. And, though Minneapolis and St. Paul are among the top 15% most affordable “large” cities for rent, that’s bumping up against the top of what can reasonably be considered “affordable.” And, given the super low vacancy rate, it doesn’t matter that our cities are “affordable” if no apartments area available. In fact, the amount of affordable housing has steadily declined in the Twin Cities since the 1960’s. That is, despite the enormous growth of development, the amount of affordable housing has not kept up with the need despite the claims that new, expensive housing must necessarily result in older housing becoming more affordable. It doesn’t. Investment in new development will always depend on an analysis on return on investment. And as long as real estate investors can keep new development at a pace below need, they will make MORE than if they didn’t. In fact, a lot of newer properties are designed to still make a profit while keeping a significant amount of units open. That is, there is an artificial suppression of available housing, which keeps the rents of those units artificially high…and the artificial high pricing trickles down from there. (This article gives more benign reasons for the 28% vacancy rates in new developments still demanding higher rents, but no one’s going to tolerate a loss in investment in those properties…unless it’s not actually a loss: https://tcbmag.com/vacancy-rates-rents-continue-to-grow/)
It is also important to note (and Bill, you wrote about this in October; https://www.minnpost.com/cityscape/2021/10/why-twin-cities-housing-prices-might-see-some-major-increases-in-coming-years/) that St. Paul has, over the last 10 years, had MUCH fewer housing units built than Minneapolis, with St. Paul adding only 30% of the number of housing units over 10 years than Minneapolis. This was WITHOUT rent control. So, that period of time in 2021 where the number of multiunit permits in St. Paul exceeded the number in Minneapolis is likely WELL outside of the norm. So, why do you think that the sudden drop in permits is due to rent control? I see absolutely nothing to support that conclusion other than the claims of people who have a reason to…um…skirt the truth to turn political favor back to unlimited profits for them.
In other words, this feels like lazy reporting.
Thank you Ms. Kahler,
I had an exchange with Mr. Lindeke regarding the article you cite further up stream. I think what we’re looking at here is a series of faith-based economic claims that use one specious argument to support another in a scheme of circularity. What’s surprises me is that these guys will basically in the same breath acknowledge the complexity of housing markets and prices, AND promote the most simplistic model they can imagine under the pretense of economic expertise. Frankly, I find this to be rather bizarre.
The previous Lindeke article for instance “predicts” higher prices as if vacancy rates are some kind of natural phenomena that just emerges from nowhere. We KNOW that he KNOWS better, but there it is nevertheless, and he’ll double down on it when you challenge that. Not to pick on Bill however, his position is obviously shared by a lot of people, many of them here in this comment section. And this constant bizarre claim that those who profit the most from low vacancy rates and the high prices that flow from them, are the ONLY ones we can turn to for lower prices and higher vacancy rates is sooooooo persistent. And then they accuse ME of being blind to reality? Whatever.
The cost of providing housing is higher than the price we consider affordable. A reality neither side seems willing to deal with. I don’t have any expectation that developers and landlords are going to provide affordable housing out of a sense of altruism but I also realize that simply capping the price of a good doesn’t reduce the cost to provide it.
So as long as people are allowed the freedom to invest their resources where they want the rent control measure won’t do anything to create affordable housing. Primarily because it assumes that it is incumbent on private property owners to provide a public good through some unknown mechanism. If they weren’t altruistic before they won’t suddenly become so due to rent control. There also isn’t any rationale as to why property owners should be the only ones shouldering the burden of providing affordable housing.
Government is the mechanism we have to provide public goods and services like transportation, parks, schools, etc. It should also be the way we fund affordable housing. It would also be much more efficient to do so in a way that targets those who need the support than it is to create a simplistic rule that, on a pure dollar measure, benefits the wealthy as much or more than those in poverty.
The measure also is flawed in that it provides no immediate or short-term relief for those who truly need it. How many years of 3% increases will it take for an apartment that is currently unaffordable to become affordable? A four-person household at 150% of the national poverty level would have a household income of $41k a year. That would mean a 2bdr would need to be about $1100 including utilities with the current average being $1400 plus utilities. Utilities is a mixed bag but lets say $1500/mo. If we make a very generous assumption that income will go up at 6%/year it will take 9 years for the average price to reach affordable levels. All calculations are without inflation since adding that in outstrips my financial accounting ability without giving myself a headache.
“The cost of providing housing is higher than the price we consider affordable.”
Perhaps. But consider this, instead: How expensive is it to NOT provide affordable housing?
The cost to taxpayers to subsidize higher rents isn’t insignificant. $14 billion in Section 8 and $3 billion in homeless aid grants from this year’s federal budget (and there’s a multi-year waiting list for Section 8*). Never mind the “nickels and dimes” used for rural development housing assistance, and other home purchase assistance. And that’s just federal expenditures on housing assistance. State, and local governments across the country spend nearly $60 billion a year for housing and “community development.” I’m not saying that the government should necessarily be building projects, but there is also no reason that developers should be allowed unfettered profits while taxpayers are spending so much just for basic housing. To add insult to injury, many housing developments get government aid in the form of tax breaks, tax payer funded infrastructure development to support such housing, and other tax payer funded incentives.
The cost of taxpayers to subsidize other basic needs (such as food and medical care) because rent takes up too much income for your average person isn’t insignificant, either. SNAP and other food subsidies (e.g., WIC) are a “small” percentage of the federal budget, but not insignificant, accounting for 1.3% of total federal spending in 2020, or about $85.6, for SNAP alone.
Taxpayers also lend a financial hand when someone can’t afford utilities. I’m not going to hunt down numbers for this, but I think you get the drift.
Taxpayers keep a LOT of people housed because the free market is allowed to maximize profits in nearly every project. This isn’t a free market, it’s a taxpayer subsidization of private profit.
*As an aside: for those who believe that school vouchers will make things better and more competitive for kids’ education, take a look at how housing vouchers work…Poorly, at best, driving up cost while reducing affordable options.
My point isn’t that we shouldn’t provide housing that is affordable. Just that the cost of actually building and maintaining it is higher than the price which can be charged and have it be affordable. It basically means the difference needs to be covered by the public as a whole. Any attempt to simply force apartment owners to provide it themselves is going to fail.
Advocates for this specific rent control program seem to deny that they are asking private entities to pick up the full cost of something that should be handled in the public sector. As I have stated over and over. It isn’t the intent that is the problem. It is that the design of the program doesn’t reflect reality.
Dan, thanks for you comments,
We can actually step outside the circularity of this discussion to some extent here by recognizing a few facts.
First, let’s note that anti-rent control/pro-market advocates like yourself are actually making two different contrary arguments. You are saying that markets cannot and should not be expected to deliver affordable housing because it’s not economically feasible while Lindeke keeps telling us that markets are the ONLY possible route to affordable housing. In this regard your position is obviously more compatible with facts and reality on the ground since we cannot help but notice we actually have an affordable housing crises that developers and markets have failed to resolve (given decades to do so).
As to your solution, i.e. public subsidies for developers; you should know that this isn’t a “new” idea, it’s been tried. The problem is the developers you would subsidize end up rejecting the subsidies because they’re not large enough to meet the profit demands. If you want to make up the difference between “costs” and post construction revenue or even just lower the costs with public subsidies you have to decide how much profit your willing to subsidize, so in the end up back where you started, we’ve been there and done that. You can create subsidies but you can’t force the developers to take them.
Meanwhile, this doesn’t really have a heck of a lot to do with rent control because rent control isn’t a development scheme, it’s a clear, efficient, and effective mechanism for… rent control. You guys can play with your markets all you want but for the first time in decades renters in St. Paul and MPLS will have predictable and affordable rent increases right now… done. And as Ms. Kahler (and I) have pointed out there are clear, distinct, and considerable economic advantages in THAT scenario regardless of new development.
Look: developers threatened to stop building in St. Paul in order to kill rent control, they lost and now they’re just following through with their threat. Whatever. Any thoughtful person would have to agree that rent control cannot be the one and only single factor determining the economic well being of St. Paul MN. This is the second most populous city in the State and it has thriving and dynamic population and economy… even if some developers pull out, this is a competitive economy wherein voids are abhorred. Other developers will step in or those who drop out will return. If you leave money on the table someone else will eventually step up.
Affordable housing is a complex problem that will require multiple solutions, rent control is just part of the equation that provide immediate and lasting relief to renters. However we know that “solutions” that revolve around simply satisfying developers profit demands don’t work, even if you offer subsidies.
I understand your point. And I don’t necessarily disagree. My point is that we don’t limit (I’m not suggesting eliminate) profit for housing developments. I guess I would be ok with unlimited profit if the developers footed all of the costs that the public often shoulders when developments get built. Street improvements, environmental studies, property and materials taxes, etc. I’d even be ok with simply ensuring that a certain percentage of units are to be provided below cost (not Section 8 subsidized) for low income families. But no. A lot of these developments socialize at least a portion of the cost and privatize ALL the profits. According to the National Association of Home Builders, the average profit off of real estate developments is about 19%. I don’t know how much a large development maintenance/management company makes, but there’s a profit there, too (or they wouldn’t be doing it). In contrast, the profit margin for a grocery store is about 2%. Yeah, yeah. I know there’s risk around throwing money at real estate…but it’s not that big of a risk unless you’re a buffoon (see, TFG). With margins nearing 20%, that risk isn’t all that high.
Your 19% average includes suburban, McMansion development and multi-million dollar condos so it’s hard to apply that without context. Like cars, there is at best little to no money to be made on the less expensive properties.
As far as making the developers pay for the infrastructure that is going to be used by the people who will live in the development – it does happen. That’s how HOAs got started. I don’t know how I feel on that one – the city is getting tax base as well.
To Dan Berg’s point, particularly at this moment in time, building costs are excessive and no landlord is going to buy a building where their costs are $1300 per unit and rent it at $1000. It’s just not going to happen, nor in my mind should it.
I mentioned this in another article, but just as I’m not in favor of privatizing profit and socializing costs (sports stadiums for example or the HOV lanes,) I don’t agree with socializing profit and privatizing costs. As Dan said, it’s the purview of Government to provide public goods – not the private sector or individuals. It’s not my responsibility to put out my neighbor’s house if it’s on fire. I would certainly do what I could, but I’m not about to buy a firetruck and hire firefighters.
Again, in a comment I made on another article – if St. Paul needs 11,000 units of housing at below-market rates, then the city should find some mechanism to build and maintain those 11,000 units at below-market rents and raise the taxes necessary to support those units.
I would suggest that it would be good to have a loan program so that low-income families could buy their unit and gain household wealth over time, but the problem turns into the same one that causes gentrification – as values go up and people sell, what once was affordable for low-income families suddenly isn’t, unless the city is going to continually subsidize the sale of the properties, which is an option, though again, it requires funds to accomplish.
What is the average margin for the types of developments being built in the Twin Cities? Unless you have a number that’s different from that 19%, the average is 19%. Yeah, some will be lower and some will be higher. Hence average. But there IS profit and it isn’t small, even in the types of developments being built here (many of which are the equivalents of McMansions, only multifamily…or rather multiprofessional). Regardless, the maximum rent on these potential new developments doesn’t appear to be limited, only the rate at which rent can be raised each year. There’s also a mechanism for an exception to be granted to ensure a return on investment. So, no worries. New developments will STILL make money.
In any case, there’s a huge gap between my criticisms of the current system and the mild hints I’ve made and the idea of privatizing costs and socializing profits. I can’t even see where that would come into play. It’s a sound bite out of sync with any reality I’ve even considered, let alone suggested.
And, although I’m not going to belabor your house fire analogy because it’s really not apt to the subject, I just have to point out that you actually DO pay for a firetruck and pay for firefighters for your neighbor’s house. Just as they pay for a firetruck and firefighters for your house. The government doesn’t get the money to do that out of thin air. We all pay a little bit. Government allows us to make big, shared purchases, and often saves us money by having the power of scale. But it does cost us money, nonetheless.
I don’t think it’s a horrible idea to allow low income families to ultimately purchase their units (good luck getting landlords on board). But it isn’t necessarily the ultimate result that such units will become unaffordable as a result of gentrification. First, gentrification is triggered by a lot more than simply wealth building and home ownership. But, aside from that, there are non-profit programs that exist that help low income families purchase their homes. In return, those families are contractually obligated to limit their profit on the sale of their home, and frequently, as a way to ensure this cycle perpetuates with the next purchaser, the non-profit retains the land under the home. This is a plausible mechanism for apartment ownership, too, but maintenance is much more complicated in a multifamily housing building than a single family house. Still, the end result is that the home remains within reach of low income purchasers, and while each purchaser may make some money on the sale of the home, anything more than the agreed-upon profit goes back to the non-profit to purchase homes to go back into the pool.
James,
Rent control doesn’t dictate below market rents for new housing. If any builder that charges $1,000 for a $1,300 unit it’s not doing that because rent control forces them to do so.
If you want to talk about profit margins you have to show us the actual margins, expenses, sale prices, and subsequent revenue. We can talk about subsidies if you want but you STILL have show us the actual numbers, you can’t demand whatever subsidy you want and claim it’s an appropriate profit margin. We do this all the time with public subsidies yet developers always reject such proposals. They just tell us the numbers don’t work and expect taxpayers will make up whatever difference they decide… that not how public subsidies work unless your building stadiums and arenas for billionaire sports franchises. In the REAL world we calculate a reasonable profit and guarantee THAT. I come from a background in psychology for instance where residential facilities are publicly subsidized and those owners were guaranteed a 6% profit margin (they actually make more but that’s the calculation). So anyone who’s serious about subsidizing new “affordable” construction needs to stop futtsing around and show us the actual numbers so we can calculate a profit margin we can afford.
In the meantime, this actually has very little to do with rent control since rent control applies to existing rents, not rents calculated to pay for new construction. All rent control does with new construction is prevent bait-n-switching wherein tenants are lured in with $1,000 rents the first year and whopped with $1,300 rents the following year.
This was a well written article. Everybody wants affordable housing. Developers will not build it unless they can make a profit. This is how capitalism works. Paul, if you insist on affordable housing without allowing developers to make a profit, you have one choice. Let the government build it. I think those are called projects. And they deteriorated all over the Twin Cities. Not sure you get that.
St Paul is the only city in the entire country to pass this type of an ordinance. If you all think it’s just a great idea, did you ever wonder why no other city has ever tried it?
All of the commenters here who think developers should be forced to include affordable housing in multi-family housing projects do not understand how capitalism works. Developers will choose to build in the suburbs and exburbs. Which they already are.
So maybe check back in a year and see how many new housing options have been built. My money is on very few. Just sayin
Yes Besty and capitalism has choices inherent. You want those developers to make a profit? Then you also need to accept the reality of homeless encampment all over the metro. While in the form of ideological construct the idea of capitalism’s “winners and losers” seems abstract, that construct in the real world means thousands of human beings unhoused, starving, and desperate. You don’t get to wish them away, or pretend they don’t exist. While one is welcome to pursue capitalistic avarice to the fullest extent, one is not always afforded the opportunity to avoid the consequences of such action, as the last few months in Minneapolis quite nicely illustrate.
“Paul, if you insist on affordable housing without allowing developers to make a profit, you have one choice. “…
Obviously non-profit development is ONE alternative model, but no one here is actually suggesting that. No one is asking developers to completely forgo their profits, the question is how much profit are they entitled to to, and how do we balance their profit motives with the needs of the community? Again, I will point out the simple fact that these people who complain about their profits and “margins” NEVER show us their books, or even tell us what kind of margins they want or walk away from. At any rate, as Ms. Kahler points out above, no one has actually demonstrated that rent control erases all profit, or even how much it reduces profit, this is a claim without evidence at this point.
At any rate, all you’re doing is explaining why affordable housing can’t be a developers priority… fine, but then stop telling us that developers are the only agents that can bring us affordable housing. You’re promoting a paradoxical model, your telling us developers will reduce housing prices but then you “explain” why developers can’t be expected to reduce housing prices because that would conflict with their profit motive. You tell us if we want affordable housing we need to look at someone other than developers to create it, but when we do just that you protest that developers are the only ones who COULD create it. You’re manufacturing a double bind.
Why would any sane developer invest in multifamily rental property in St. Paul with a 3%/year rent control with inflation at 10% w/o energy and with energy energy costs increasing at 30% as well as increasing interest rates? Your article is a good start but you need to also look at the effect of inflation and financial cap rates for investors.
Quite frankly the unintended consequences of the 3% rent control with no inflationary exception, no interest rate exception, etc. was very predictable.
“Why would any sane developer… (snip)”
It’s funny how these people pretending to be the business minds around here just keep retreating from one specious claim to another organized around faith-based claims that actually ignore reality. The start with the obviously false claim that developers and new developments cannot help but reduce housing prices and rents, and then it just goes down hill from there.
Mr. Downing; rent control does NOT establish or limit the initial rent that a developer can charge after they build whatever they build and it has zero effect on anything that’s built for sale, i.e. townhomes, condo’s, homes etc. Rent control does NOT lock builders into any kind of business models destined for failure. The only reason they’re backing off their permits in St. Paul now is because they’re following through on a threats they made when the were trying to defeat the initiative.
Developers can charge whatever rents they need to after the complete they complete their projects and they can adjust their business models accordingly. All rent control does is limit rent hikes for EXISTING leases. As for inflation… let’s not pretend that the first inflationary period in 50 years has somehow retroactively raised rents for the last 30 years. AND I repeat for the umpteenth time the fact that landlords facing such costs can file for variances, they’re not inextricably trapped in 3% caps even when some expense or another blows a hole in their budgets.
Developers will build in St. Paul because it’s the second largest city in the State, it’s the home of several large and successful national and international corporations, and a thriving urban milieu with a vibrant culture. It’s the same city they wanted to build in for the same reasons it was before rent control. For every landlord that walks away from the rent 100+ thousand people pay every month in St. Paul there’ll be another that’s happy to collect it. For every landlord that wants to whine about having file a little additional paperwork, they’ll be another who’s happy to file it… I don’t know who needs to here this but competition is one key features of capitalism and any money one business leaves on the table another business person will be happy to grab. Furthermore, people who want to live in a city will NOT be driven away by affordable housing, on the contrary. The prospect of affordable and predictable rental costs is more likely to attract people than repel or drive them out to the suburbs or even just MPLS where they face higher and unpredictable rents and rent increases.
I predict a lot of rental units will soon be listed as “furnished” units and charge a “furnishing surcharge” that is separate and distinct from the base rent. And those “furnishing surcharges” are going to increase annually in line with property tax increases, insurance increases, maintenance costs, and investment return.