Only a week has passed since the Minnesota voters approved the comprehensive rent control ballot initiative. Developers are already putting off projects, while the city leaders try to change the least harmful parts of the law.
52 percent of the voters supported Question 1 in Tuesday’s municipal election. It imposes a strict annual limit on rent increases at 3 percent. The ordinance doesn’t allow for inflation, nor does it provide exemptions for new construction and vacant apartments that is common in other rent control policies.
This new ordinance won’t take effect until May 20,22. Many real estate companies that have large-scale projects on the horizon announced they would withdraw their permit applications.
Ryan Companies is included. KARE 11 (local NBC affiliate) reports that the company applied for three buildings as part of its planned Highland Bridge project, which would create 3,800 new homes.
KARE 11 was informed by a senior executive of the company that Ryan and City had taken great care when creating a financial plan that utilized market rate developments for funding. This will allow financing to help create deeply affordable housing at Highland Bridge and elsewhere in Saint Paul. The rent control policy is threatening the financing sources for market-rate projects, and thus the overall finance plan.
Others are also singing the same tune.
“We, like everybody else, are re-evaluating what—if any—future business activity we’ll be doing in St Paul,” Jim Stolpestad, founder of development company Exeter, told the Minneapolis Star-Tribune.
It Star-Tribune Reports indicate that some developers called Nicolle, the city director of planning, and economic development to tell her they would place hundreds of additional units on hold as a response to rent control.
Goodman informed the St. Paul city council last Wednesday that they don’t want their equity goals conflicting with our growth objectives. Star-Tribune These goals may be put at odds by the ordinance written as it stands.
On Monday, Melvin Carter, newly elected mayor, sent an email message to St. Paul City Council stating that although he supports “rent stabilization”, it is not a sufficient tool for affordable housing. However, he believes the voter-approved ordinance could be improved.
The reason virtually all other current rent control ordinances exempt new construction is because they allow a reasonable return. readsThe email. The email reads: “The Mayor asks you to consider an amendment that exempts new housing construction. He will sign it once it gets to his desk.”
It would also make St. Paul’s current rent control policy closer to policies in other parts of the country.
Oregon and California, both of which have passed state rent control ordinances for 2019, exempt buildings less than 15-years old from price caps. New York’s rent stabilization law, which dates back to 1974 and applies only to units built after that date.
Carter mentioned in an email that Carter is trying to convince developers and investors to get a good return on their investment so as to encourage new construction. Some economists believe that, even with exempts from new construction, rent control policies can still lower the value and discourage some new construction.
This academic argument is irrelevant in St. Paul, where developers actively walk away from in-progress project because the new ordinance doesn’t provide an exemption for new construction.
Even with the amendment to allow for new construction, St. Paul’s rent control ordinance will likely reduce rental housing supply.
This 3 percent limit on annual rent rises is quite strict. Oregon and California allow annual rent increases of 5 percent and 7 percent, respectively. The rent increases allowed in New York apartments that are rent stabilized are usually much less and often range between 1 to 2 percentage.
Oregon and California allow landlords to account for inflation in rent increases. St. Paul’s ordinance does not allow for inflation. This means that landlords are required to reduce the rents they charge if there is an increase in prices above 3 percent. The ordinance of St. Paul also prohibits landlords from raising rents above the 3 percent limit for vacant units.
These factors could lead landlords to decide to get out from the rental market and instead sell their homes to owner-occupiers. The attractiveness of this alternative is only enhanced by the rising home value in St. Paul where prices increased 12 percent last year.
In San Francisco, where rent controls were expanded to limit future increases in rents, there was a 15% reduction in housing stock. This 2018 study shows that this happened. The study revealed that while incumbent tenants enjoyed handsomely the limitations on rent rises, their gains came at the expense of future residents’ welfare.
St. Paul’s current and future renters can expect the same result, even if the new city ordinance was amended to exclude new construction.