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In first months since passage of St. Paul’s rent-control ordinance, housing construction is way down

The decline may have a lot to do with the inherently conservative nature of most construction financing.

A new apartment building on West 7th Street in St. Paul.
A new apartment building on West 7th Street in St. Paul.
MinnPost photo by Bill Lindeke

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.

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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.

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

 

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.”

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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.

A vacant lot awaiting development on University Avenue.
MinnPost photo by Bill Lindeke
A vacant lot awaiting development on University Avenue.
In other words, the steep decline in building permits does not mean there never will be market-rate construction under St. Paul’s nascent rent control policy. Because of the wide variety of financing types, some projects will still attract angel investors or “mission-driven” funds, which are becoming a larger trend for institutions like pension funds. Perhaps there will be an increase of local investors that can look past city-specific financial hurdles. But in the big picture, most financing comes from institutions inherently conservative about how they evaluate risk. So far, most actors seem reluctant to invest in St. Paul.

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.

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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.