Rent Control Update

Last week St. Paul’s City Council held a public hearing on rent control, to receive both the rent control task force recommendations and public comment. I testified to our ongoing and deep concerns about the initiative in that it will actually slow down or even stop both new development of housing and investment in current properties. The issue remains divisive, though there is strong support across the community for the need for more affordable housing.  The challenge continues: how to do that?
 
The taskforce submitted its recommendations, most notably the 15-year exemption for new construction. The 3% annual cap remains unchanged, and other recommendations like vacancy decontrol were not well-clarified. The full report is available online.
 
My thoughts: As you know, the Chamber has been an outspoken opponent to the rent control ordinance.  I remain convinced that rent control will hurt the people it’s intended to help, and will halt more investment. I’ve written about it in former blog posts. I also recommend you read again Bill Lindeke’s blog post on its impact on property taxes – which, as we know, translates directly back to costs of housing.
 
Our ask of the City Council:

• 30-year exemption on new construction (to facilitate financing and mitigate risk);
• Clear vacancy decontrol allowance; and
• Annual cap that takes property taxes and inflation into consideration

 
Lindeke said it best in his Twin City Sidewalks posting, “Why the 3% cap stops new housing construction.” Here is an extended passage from his article:
 
Whether or not it’s possible [for landlords] to make money with a 3% rent cap in place is irrelevant.  It’s about the financing . . . It’s also not really about whether developers make money. . .  Ask anyone who does economic development, and they’ll tell you that developers have trouble getting financing for new housing in Saint Paul as it is.  It will become impossible to get loans to build when the city has become three times as risky as anywhere else in the country.  The people who finance construction have plenty of choices about where to [finance] build[ings].  When it comes to building new housing, St. Paul will basically be redlining itself.  
 
The last several years have seen unprecedented rental housing development in St. Paul.  New construction and renovated buildings – with both market rate and affordable rents – can be seen throughout the downtown and the west side river flats, along the University Avenue light rail corridor, on Snelling Avenue south of I-94, and now coming to Highland Bridge.  This list does not even include the Sears site or the former Hillcrest golf course.   Alarmingly, the rent control initiative is placing all these projects at risk.
 
The math is straightforward. This year alone is a striking example of how this ordinance must be improved to take inflation into account. Three factors are immediately before us:

1. According to the Mortenson Cost Index, construction costs rose 18.2% between Q1 2021 and Q1 2022 in Minneapolis. Those rising costs are being experienced across the construction market here and nationally.
2. The U.S. inflation rate, as of June 2022, is at 8.8%, the highest since December of 1981 – and even ahead of market forecasts. 
3. ​The City of Saint Paul is facing real budgetary challenges due to the recent lawsuit regarding how we handle street work assessments.  That alone represents a $15 million budget gap. There is significant possibility that a portion of that gap will be made up through increased property taxes.

 
The evidence:

• A recent Wall Street Journal editorial talks about St. Paul’s rent control backfire. Of special note: “Multifamily building permits in St. Paul have plummeted nearly 82% between November 2021 and January 2022, compared with the same period a year prior, according to data from the U.S. Department of Housing and Urban Development.”  If we account for anomalies of pandemic “rebound,” permitting is still down 55%.
• The National Bureau of Economic Research recently published a working paper on “The Redistribution of Wealth Caused by Rent Control.” In running economic projections, they found that “to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.”  
• I’ve spoken with several renters in St. Paul:  non-rental fees are increasing, security is being reduced… real-life examples of how property owners will be forced to cut costs to meet mortgage payments, driving down the quality experience of existing housing.
• In previous issues of this blog, I’ve referenced several examples rental properties that were sold in the last year to out-of-state investors. In advance of rent control? For you to decide…

 
I’m not speaking in hyperbole here: rent control has caused property values to fall by 6-7% already, permits are down by 55%+, costs are up 18%+, inflation is at 8.8%, some existing property owners are selling, and future investors are moving on to more welcoming markets.
 
This impossible burden is weighing on the hearts and minds of good people who hear the very real testimony of people needing stable housing and who fear the problems will only get worse.

See you in the trenches.
B ​

• The Star Tribune writes about the Twin Cities’ deadliest year in 2021. And every victim had a story.  
• On Friday, Mayor Carter unveiled a wide-ranging $10M effort to reduce violent crime in the city.  He was joined by U.S. Senators Klobuchar and Smith, as well as city police and public safety officials. These efforts, some of which have yet to be approved for funding by the St. Paul City Council, will range from hiring additional police officers to issuing $4 million in grants to fund community-led public safety initiatives, as well as traffic calming and an external review of public safety needs in the St. Paul Public Library system.

• Following news that the Consumer Price Index reached a four-decade high of 9.1% growth year over year, Federal Reserve Bank of Atlanta President Raphael Bostic left the door open for an interest rate hike of 100 basis points, while Cleveland Fed President Loretta Mester said there was "no reason" to raise rates by less than 75 basis points and San Francisco Fed President Mary Daly said a 75-point hike is still her "most likely posture." (Bloomberg) President Joe Biden said in a statement that while the newest inflation figures were "unacceptably high," the numbers were "out of date" since they did not reflect recent decreases in gas prices. (The Hill).
• Wholesale inflation in June surged 11.3% from a year ago.  Increases are led by energy prices, 54% ahead of a year earlier.
• US weekly jobless claims at highest point in nearly 8 months. But the total number of those collecting benefits fell.
• Are we in a recession? 2 in 3 voters say Yes.

Regional

• St. Paul’s rent control task force recommends 15-year exemptions for new construction. The task force submitted its wide-ranging recommendations to the mayor’s office in June, and the final report calls for maintaining the existing 3 percent cap on annual rent increases while adding a 15-year exemption for new construction. Beyond that, other recommendations are more general than some members would have liked (for example, vacancy decontrol remains unclear). 
  
  • Here is a recent Wall Street Journal opinion piece on St. Paul’s rent-control backfire: building permits are falling, and so will the supply of affordable housing.
    
  • Here is a working paper from the National Bureau of Economic Research, estimating the effects of St. Paul’s rent control on the value of real estate in St. Paul – and on the transfer of wealth across income groups.
• St. Paul City Council considers pre-K, childcare ballot proposal. This after an insufficient # of signatures were collected to push the issue through. The cost — $2.6 million in the first year, $5.2 million in the second year, $7.8 million in the third year and so on — would increase St. Paul property taxes $2.6 million each year for 10 years, at which point voters would be asked on the ballot to reauthorize the program. Here are the details.

 
Election season is ramping up. Be sure to reference our East Metro Voter Guide to learn more about your candidates!
 
Subscribe to our Chamber Advocacy Update to keep up with advocacy news.

• Securian Financial is throwing a party at Mears Park the afternoon of July 21 to celebrate being back together and to thank their employees for their dedication. The community is invited to join them from 2-4 p.m. for free fun in the park, including music by Romantica and The Sunken Lands. Beverages – including local wine and craft beer – will be available for purchase. Consider making an evening of it by patronizing nearby businesses before returning to Mears Park for the outstanding Lowertown Sounds music series.

• Check out your Chamber’s calendar of upcoming events as well, which include:
  • Get a Tourism Update with Explore Minnesota at our Roseville Business Council: July 27, 7:30am, at McGough.
  • Come meet some new people at our next free monthly mixer! July 27, 3:30 – 6pm: Chamber Connect at Saint Paul Brewing.
  • August 1: Golf Classic at Mendakota Country Club.  Golfing is sold out, but join us for Golf 101 and dinner!
  • 2022 VIP Vikings Training Camp Experience: August 3, noon – 5:30pm, at MN Vikings TCO Performance Center!
• MSPBJ celebrates key players in our state's economy with fifth annual Minnesota Manufacturing Awards. ​​

• For most of Minnesota’s largest employers, staffing remains below pre-pandemic levels. And not on purpose: with unemployment levels so low, hiring is proving be extraordinarily difficult.

• Twin Cities hotels see COVID-era rebound. Pre-COVID occupancy rates in June of 2019 = 78.8%.  Occupancy rates dropped to 31% in June of 2020, back up to 78.2% in June of 2022. Minneapolis is at 61% occupancy, St. Paul is at nearly 70%, Bloomington is even higher.
• Cost-of-living crisis to hit women hardest, according to the World Economic Forum. It also points to a widening gender gap in the global labor force.
• St. Paul, Ramsey County direct $24.8M in COVID aid toward workforce development. Many of the initiatives will focus on job training for youth. The two local governments also have pooled their American Rescue Plan funds to pay for the $74.5 million construction of 1,000 permanent affordable housing units.  Here’s how cities across the state will spend a total of $3.3B in federal COVID-19 aid.
• Nice article in the Star Tribune on how downtown St. Paul is finding it way forward.

• Feds approve $68.4M to help build out high-speed internet in Minnesota. The target: roughly 8% of the homes and businesses that still lack service. We are 1 of 4 states to receive this additional funding.
• The silver lining of office vacancies. Tenants have lots of options right now. “The flight to quality could be good news for developers, but creates challenges for owners of older properties.”
• Minnesota’s ranking falls from 7th to 9th in CNBC’s Top States for Business list.  Largely due to the state’s infrastructure. ​