https://www.nationalreview.com/news/st-paul-rent-control-initiative-backfires-unleashes-chaos-in-housing-market/?utm_source=email&utm_medium=breaking&utm_campaign=newstrack&utm_term=25698466
“We said this would happen. This should be no surprise,”Likewise on the forum.
https://files.americanexperiment.org/wp-content/uploads/2021/10/Rent-Control-Report-Njolomole.pdf
From the NR article:
St. Paul Rent-Control Initiative Backfires, Unleashes ‘Chaos’ in Housing Market
By RYAN MILLS
November 14, 2021
Democratic leaders in Minnesota’s capital city are scrambling for solutions after developers put several large projects on hold across St. Paul in the wake of last week’s election, when residents approved what may be the strictest rent-control policy in the country.
The rent-control ballot initiative in St. Paul was overshadowed nationally by an effort in neighboring Minneapolis to disband that city’s police force. But while the Minneapolis police initiative went down in flames, left-wing activists on the eastern bank of the Mississippi River succeeded in their effort to cap rent increases at 3 percent annually, including on new construction, a step most communities that have imposed rent-control policies have specifically avoided out of concern that it would discourage future investments.
The St. Paul initiative passed last week with 53 percent support.
Opponents of St. Paul’s rent-control initiative warned before the vote that developers and financial investors would pull the plug on projects if the ballot measure were to pass. And that appears to be exactly what’s transpired over the past week. Large developers who spoke to the Minneapolis Star Tribune and the St. Paul Pioneer Press told reporters that they’re pausing their projects across the city, and they are “re-evaluating what – if any – future business we’ll be doing in St. Paul.” Lenders are pulling out of new projects, they say, worried about the impact of the new policy.
Attempts by National Review to reach those developers for comment were unsuccessful.
B Kyle, president and CEO of the Saint Paul Area Chamber of Commerce, said her organization is in the process of cataloguing all of the projects killed or put on hold because of the measure. It’s not just new development projects at risk, she said. Kyle said she’s already been told of dozens of buildings that have had 2022 rehabilitation projects stopped. She said there’s now “chaos” across St. Paul because of the rent-control measure.
“We said this would happen. This should be no surprise,” Kyle said, noting that opponents of the initiative were accused of being hyperbolic and pushing a “disaster narrative.”
“The truth is, we’re seeing it. This isn’t about emotion,” she said. “This is about how does a deal get financed, how does a project cash-flow, can you make a fair profit on a deal?”
“Developers will do deals where it makes sense for them to do deals. Our goal in St. Paul is to make this as inviting an environment as possible, so investors . . . want to bring their projects here, because St. Paul desperately needs more housing across the entire spectrum.”
Proponents of the rent-control initiative said it was desperately needed to offer predictability to both tenants and landlords and to advance racial justice in the city. St. Paul would “lead the nation in rewriting the outdated and unfair rules that give landlords unlimited power to economically exploit their tenants,” one rent-control supporter wrote in the online MinnPost.
Proponents acknowledged that annual rent increases in the Twin Cities have averaged less than 3 percent over the past two decades, but “BIPOC renters are the most likely to experience egregious rent spikes well above 3 percent.” They dismissed warnings that rent control would imperil new developments and disincentivize property owners from improving the quality of their buildings, uncontroversial opinions among the vast majority of economists. They argue that the developers are bluffing about pulling the plug on projects, and all they’re really trying to do is scare residents and city leaders in order to change the ordinance.
But Kyle said the concern about the future of those projects is very real. Even nonprofit and senior-housing developers fear their financial models won’t work under the new policy.
It’s not about greed, or good people versus bad landlords, Kyle said. “It’s about math.”
Investors naturally are inclined to pump money into communities where they have a better opportunity to make a return, and into communities that offer them more flexibility.
“New construction will not go where it is harder to do business, and rent control will stop new investment that comes in from outside this market,” Kyle said, noting that a recent Minnesota housing task force report found that the state already is well off the pace of building the 300,000 new homes that will be needed by 2030. St. Paul needs to elevate its image to continue attracting investors, Kyle said, and “this does not help.”
“We in St. Paul do not have the luxury of being cavalier about our housing market,” she said. “We need to be as earnest and inviting and participatory as possible.”
In addition to curbing the development of new homes, Kyle noted that the rent-control initiative also threatens the stock of existing rental homes and the quality of those homes.
St. Paul property owners already are facing a 7 percent property-tax increase next year. Add in 6.2 percent inflation – a 31-year high – employee wage increases, and a 3 percent cap on rent increases, and there are plenty of incentives for owners to sell their single-family rentals and to convert their apartments into condominiums. That’s happened in other cities, and it could happen in St. Paul, too, said Joe Hughes, a local businessman who owns about 20 small apartment buildings in the city
“When these houses that are rented sell, that’s going to be a net loss for the BIPOC community,” Hughes said. “I think there will be a higher percentage of white people buying them than there are living in them now.”
Hughes is critical of another aspect of the rent-control initiative that he says threatens his business. Hughes said he and most of his friends in the rental-property business typically try not to impose significant rent increases on their tenants. “The vast majority of rent increases that we did are $10-, $15-, $20-a-month increases,” he said. As a result, after several years, some tenants end up with monthly rents that are well under market value.
Typically, he said, owners would bring the units up to market when the tenants moved out. But that’s not allowed under the new rent-control policy: The 3 percent limit applies even when turning over a rental home to a new tenant. Proponents of the measure said that was necessary to disincentivize landlords from giving tenants the boot simply so they could jack up rents. Hughes said it will instead force landlords to adjust their business models, potentially passing on larger increases than they normally would to all their tenants.
“I think in the next couple years we’re going to have higher rent increases than we had the last few years,” he said.
Property owners who don’t sell their rental units also will have little incentive to improve their properties beyond keeping them up to code, and small investors looking to buy and refurbish older buildings may think twice if there is no guarantee they can charge a high enough rent to make the math work. The ballot language does direct the city to create a process for landlords to file for an exception to the 3 percent rent-increase limit to allow for “a reasonable return on investment.” But, Hughes said, “we don’t know anything about what that’s going to look like.”
“If you’re looking to buy a building that needs improvement, are we going to know what we’re going to be able to charge before we buy it, what we’re going to be able to charge for rents after the renovations?” he asked. “A lot of these old buildings need a lot of work.”
Hughes said it’s been “super frustrating,” because many proponents of the rent-control initiative don’t understand his business, and they often came to the debate thinking that property owners and other opponents of the rent-control initiative had bad motives.
“We thought the people that voted for it were well-intentioned and were trying to do the right thing, whereas they looked at us as just being non-compassionate, greedy people. That was a frustrating debate to have,” Hughes said. “To think that they’re at a different level morally and ethically and stuff like that is just ridiculous.”
In response to the news that developers are pausing projects and that lenders are pulling their money, St. Paul mayor Melvin Carter has urged the city council to work with him to exempt new construction from the rent-control mandate. The ballot language is silent on new construction, though advocates of the rent-control initiative were clear that it would apply to new construction. Because it was a citizen-driven ballot initiative, there is doubt among some city leaders that they have the legal ability to amend it.
“The opposition was concerned about this very detail. Now that it’s passed, our understanding is the language stands,” City Council president Amy Brendmoen told the Pioneer Press. “We can’t make changes that are substantive, and I think this would qualify as substantive.”
Kyle said that according to the chamber’s reading of the ordinance, she doesn’t think the city council can simply amend the policy to exempt new construction.
“I leave that to the city attorney to figure that out” before May 1, when the policy takes effect, she said. “I would say the mayor and the city council have a lot of work ahead of them to figure out what this looks like between now and then. And all I can tell you for sure is there is chaos right now.”
