It’s only been since early November when voters in St. Paul, Minnesota, approved a sweeping rent control ballot initiative, but developers are already pausing projects while city leaders scramble to amend the most harmful aspects of the new law.
In the most recent municipal election, 52 percent of voters approved Question 1, an ordinance that puts a hard annual 3 percent cap on rent increases. It makes no allowances for inflation or exemptions for vacant apartments and new construction that are typical in other rent control policies.
The new ordinance doesn’t go into effect until May 2022. Nevertheless, several real estate companies with large projects in the works have already announced that they’re pulling their permit applications.
Several real estate companies with large projects in the works have already announced that they’re pulling their permit applications.
That includes Ryan Companies. Local NBC affiliate KARE 11 reports that the company pulled applications for three buildings in its proposed 3,800-unit Highland Bridge project.
“The City and Ryan took great care in creating a finance plan that leveraged market rate developments to provide funding to support deeply affordable housing creation both at Highland Bridge and throughout Saint Paul,” said a company executive in a statement to KARE 11. “The rent control policy threatens the funding sources for market rate projects and therefore the overall finance plan for the development.”
Other developers are singing a similar 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.
The Star-Tribune reports that developers have also been calling Nicolle Goodman, the city’s director of planning and economic development, to say that they were placing hundreds of new units on hold in response to the passage of rent control.
“We don’t want our equity goals to be at odds with our growth goals,” Goodman told the St. Paul city council at last Wednesday’s meeting, reports the Star-Tribune. “The ordinance as written may actually put those goals at odds.”
In response to the developer reaction, freshly reelected Mayor Melvin Carter’s administration sent an email to the St. Paul City Council on Monday saying that while he supported “rent stabilization” as one necessary tool to make housing affordable, the new ordinance passed by voters could use some work.
“Allowing a reasonable return on investment is why virtually every other rent control ordinance in effect today exempts new construction,” reads the email. “The Mayor requests you consider an amendment to exempt new housing construction, which he will sign once it reaches his desk.”
That would make St. Paul’s new rent control policy more similar to those that exist in other states around the country.
Both California and Oregon, which passed statewide rent control ordinances in 2019, exempt buildings that are less than 15 years old from their price caps. New York’s long-standing rent stabilization law mostly applies to apartments built before 1974 or to newer units that received certain tax benefits.
Some economists have argued that even with exemptions for new construction, rent control policies still suppress the value of new buildings and thus deter some amount of new construction.
The idea, as Carter’s email mentions, is to allow investors and developers to make a decent return on a project so as not to deter new construction. Some economists have argued that even with exemptions for new construction, rent control policies still suppress the value of new buildings and thus deter some amount of new construction.
That academic debate is kind of beside the point in St. Paul where developers are actively walking away from in-progress projects because of the new ordinance’s lack of an explicit exemption for new construction.
And even with an amendment for new construction, St. Paul’s rent control ordinance is still likely to reduce the supply of rental housing.
The 3 percent cap on annual rent increases is itself pretty strict. California and Oregon permit annual rent increases of 5 and 7 percent respectively. Allowable increases at rent-stabilized apartments in New York are typically much lower, and are often in the 1 to 2 percent range.
Both California and Oregon also allow landlords to factor inflation into rent increases. St. Paul’s ordinance makes no allowance for inflation, meaning that if prices rise more than 3 percent, landlords will effectively be required to lower the real rents that they charge. St. Paul’s ordinance also does not allow landlords to raise rents beyond that 3 percent cap for vacant units.
All of this could well encourage landlords to just get out of the rental market altogether and sell their properties to owner-occupiers. Rising home values in St. Paul, where prices have increased 12 percent in the last year, only make this option more attractive for landlords.
This is what happened in San Francisco where an expansion of preexisting rent controls led to a 15 percent reduction in the supply of rental housing, according to one 2018 study. That study found that incumbent tenants benefited handsomely from the limits on rent increases but that their windfall came “at the great expense of welfare losses from future inhabitants.”
Even if the city’s new ordinance is amended to exempt new construction, St. Paul renters, current and future, can expect a similar result.
This post first appeared at Reason.com.