Saint Paul enacts rent control

[paiste13]

Saint Paul voters approved a rent control measure. This post is not to debate the merits or downfall of such an act - it has already passed. What I am interested in for this forum is the development perspectives this affects.

https://news.yahoo.com/st-paul-minneapo ... 27574.html

Some landlords say they will convert their rentals to condos. If condos could make them the most money, wouldn't they have done that already? Others say they'll only own rentals in suburbs. Again, if that was most profitable wouldn't landlords already be doing that?

Wouldn't larger suburban apartment developers secretly be for this measure since it makes the theretical value of their properties go up ebcause they're not constrianed buy the Act? I think where this will hurt, development-wise, is that smaller homes in places like Richfield or Roseville may become rentals while smaller homes in Saint Paul become owner-occupied. I don't see that as a bad thing, neccessarily.

How do you think this Act will affect development?

[uptownbro]

I think you will see a shift to more condo development (not a bad thing per say if they build/convert affordable ones) and depending on the specifics of the policy a slow down in new residential rentals within the city. San Fran has rent control and is still building new rentals so its not as if new construction will end completely

[Mdcastle]

Apartments stay apartments because landlords would rather have a steady revenue stream rather than to cash out. Condo conversions aren't about "making more money" but cashing out in a situation where keeping the asset is no longer an assurance that you're not going to lose a ton of money on it.

Currently you can landlord in the city and/or suburbs. Some of the people I know that own a couple of houses do one or another, or both, as the money they make is about the same. If suddenly you make a lot less money landlording in the city, why wouldn't you switch to the suburbs.

The person I work with that owns houses in Minneapolis has told me he will cash out of the 5 houses he keeps as a "retirement account" if Minneapolis passes rent control, and then just put the money in an IRA or something. He doesn't make money now, which is fine because the houses are his retirement, not his income. But he can't survive a huge loss on them if there's a bad year and he can't raise rents to recover expenses.

[Mdcastle]

I think you will see a shift to more condo development (not a bad thing per say if they build/convert affordable ones) and depending on the specifics of the policy a slow down in new residential rentals within the city. San Fran has rent control and is still building new rentals so its not as if new construction will end completely

The difference is San Francisco it doesn't apply to new units. Developers care less if rent control applies after 15 or 20 years as opposed to immediately.

[uptownbro]

Minneapolis did pass question 3 which gave the city the power to enforce rent control but all levels of govt have said they want to avoid the market driven issues with rent control in the past. Good point on SF

[thespeedmccool]

Gotta remember it's also a question of future value of their holdings. A unit that will generate $1,000 or more every month in 2021 dollars ad infinitum is worth millions. On the other hand, if you cannot guarantee that the rents will outpace inflation forever, the future value of each unit drops significantly. It's not just about cash flow, but also asset value.

In other words, a rent-controled building sells for a lot less at the market because it can only generate so much future rent.

[paiste13]

In other words, a rent-controled building sells for a lot less at the market because it can only generate so much future rent.

Sounds like this is a way to increase home ownership and/or reduce the cost of entry-level houing in the city?

[uptownbro]

The issue is it usually ends up benefiting renters who are well of or first into the rent market as they dont give up there rent controlled unit at the same pace as market rate. Some well of renters will also pay under the table to secure a unit. The policy reduces new supply into the market over time due as SpeedMcCool broke down and we end up with a very large deadweight loss that hurts those most in need of affordable units. The city would need to grant a large number of exceptions for landlords on how to price there units. I think we might also see this drive up the price of new rentals as they might want to start at a higher price to counter expect years of minimal price increases. Anyways thats the end of my economics lecture on this back to the policy the city passed!

[Mdcastle]

https://www.startribune.com/developers- ... 600113731/

Less than 24 hours after St. Paul voters approved one of the country's most stringent rent control policies, Nicolle Goodman's phone started to ring. Developers were calling to tell the city's director of planning and economic development they were placing projects on hold, putting hundreds of new housing units at risk." We don't want our equity goals to be at odds with our growth goals," Goodman said in a presentation to the City Council Wednesday. "The ordinance as written may actually put those goals at odds."

Seems this could also affect Ryan's ability to get financing for parts of the Highland Bridge project.

The supporters response: "They're just bluffing to try to overturn the ordinance and St. Paul is such a wonderful city to build in that there's no possible way rent control could dissuade anyone from building here, no no no."

[Tiller]

I was thinking about this a couple days ago, but I have a prediction:

the Rent stabilization Ordinance won't actually impact profitability or Operations in a direct way. But because the people who make decisions believe it will, they will act accordingly, causing the negative effects to happen despite the lack of direct impact from the Ordinance.

Sorta like white flight, in that it was caused by white people's fears of what would happen if black people moved in, not by what actually happened when a black family would move to their neighborhood. Because unlike what those white people believed, black people moving in weren't going to just destroy the "neighborhood character".

[thespeedmccool]

Something to keep in mind is that rates of return matter a lot, especially to financiers.

Economics teaches that people will do anything so long as it is profitable, but that's not how real people operate. Sure, in a perfect world with no barriers to developing (in this case, rent control,) developers will build anything that's profitable. However, when there's significant investment required to meet zoning laws, overcome NIMBYs, or assess the implications of a new rent control policy, developers will do what's most profitable dollar-for-dollar and avoid hard-to-develop areas in favor of easy ones.

Further, banks are looking to fund whichever projects return the highest rate for their own capital. If there are two identical projects, but one would be rent-controlled and the other would not, the bank will every day fund the non-rent-controlled one.

The housing market is hot in St. Paul, but is it hot enough to attract developers and financiers in the face of rent control? I think they'd probably rather go somewhere else, but we'll see.

Hopefully the council can find some wiggle room for new construction.

[alexschief]

Yeah, I think people are missing some important details here.

The major stumbling block to housing production under rent control isn't developers, it's lenders. Developers are more often locals with some personal attachments to a place. They rely on their knowledge of their market to succeed. That local knowledge doesn't just mean knowing the best places to build, it also means knowing the regulatory environment. A developer that understands how to get a project through a specific city's permitting process has a big advantage over one who doesn't. A developer who knows how to navigate a rent control regime has an advantage over one who doesn't. Sometimes, developers even prefer tough strict regulations (although probably not here) because they can shut out smaller or out-of-town competition.

But lenders are different. Lenders can be banks or pension funds or wealthy friends and family. They tend to be a lot less local. They have a lot of places to put their money. They may have the opportunity to lend on projects in a bunch of different cities. When they compare those projects, they'll notice right-away that one of the project cities has a 3% annual rent cap with no allowance for inflation, no vacancy decontrol, and no exemption for new construction. That project is less likely than the others to attract these lenders.

What these lenders worry about isn't necessarily a limit on windfall profits. In fact, most aren't looking for that. What they are looking for less risk (that's why they're investing in real estate instead of tech startups), and what the rent control ordinance means is greater risk. In 2021, for instance, inflation ran above 3%. So lenders are going to look at extremely recent experience and see the risk of losing their money to inflation. Another example comes from 2020, when young people moved back in with parents and empty nesters delayed downsizing. Demand collapsed and rents plunged. Then this year, once people began to get vaccinated rents began to surge again with demand. Without the flexibility to respond to changing conditions, lenders will look again at recent experience and see the risk of losing their money to market shocks.

So to sum up: the primary reason the un-amended rent control ordinance is likely to lead to the housing pipeline drying up is specifically because it creates uncommon risks (not diminished profits) for lenders (not developers).

[mplsjaromir]

The idea that capital has many options at this point in time is ridiculous.

Every day, asset managers have to talk clients off the ledge from putting their money in dubious novel investment schemes. So generally they advise to invest in equities whose values are unmoored from any established investment analysis. Why do they have to do this? Because the managers do not have much else to offer. If they could present their clients an actual investment (an apartment building in a desirable area) it would have no issue finding funding.

Are developers pissed about the ordinance? You bet they are. Are the 'forces of capital' pissed? Oh yeah. Using democracy to curtail their ability to do what they please is their worst nightmare.

Investing in the desirable areas of St. Paul is no more risky than it ever was. 10 year average of US CPI is 1.9%. 40 year average is 2.6% The federal reserve is more than capable of hitting their target of 2%. The Federal Reserve is really the only functioning edifice in the entire country, so if they fail its game over anyway.

If you are a sane asset manager and your customer wants you to buy them Dunecoin or a monkey .PNG asset or a meme stock, they would much rather offer an apartment building in an area with good jobs and relative low costs.

[thespeedmccool]

That just kinda misses the point.

It's not just about outpacing inflation, it's about finding the best rate of return for their investment.

Rent control won't make St. Paul unprofitable for investors, but it will make it less profitable. Capital is limited, so it will flow to whichever projects are most profitable. An apartment project whose rents can increase 5-10% every year is more valuable, and will therefore sell for more, than one whose yearly increase is capped at 3%.

Of course investors need to outpace inflation, but that's not really a concern. Investors also want to make lots of money, and St. Paul just capped how much money they can make. Not saying that's a bad thing, but it will suppress new construction - the question is just how much.

New construction really probably should've been excluded, but we'll see what the council can squeeze out in terms of wiggle room.

[uptownbro]

Banks dont have unlimited access to cash. Its not that this will end all rental development in the city its that it will decrease it. Some will shift to other inner ring parts of the metro which will be far less risky for them.
On the point about new construction even adding a 5-10 year grace period would help as that would give them time to figure out the market. The other outcome is new rentals will have jack up starting rent prices when opening to cover years of constrained profits and or losses. Over all unless city leadership can give developers some wiggle room(not saying bend over backwards for the blackrocks of the wolrd) it will make the housing shortage worse.
Inflation while a good measuring stick doesnt factor in depreciation and repair costs

[mplsjaromir]

You missed the point I made. This environment, 2021, capital is starved for avenues of investment.

The loans to build these projects will be just fine. No need to worry about servicing debts, the revenue grows and the repayment schedule doesn't change. The asset (Real Estate + building) is an area (metro MSP) that has seen strong economic performance.

Management companies than want to milk every dollar from their tenants will likely look elsewhere (the goal), but an average REIT would be fine with a 3% annual growth rent cap.

People are making foolish bets. There may be theoretically better investment opportunities. But if you can't get in on those one would choose something with a greater return than a T bond, but less crazy than a rental car company trading at 8X from January. Real Estate, cryptocurrencies, equity markets, have all seen huge appreciation. This is because there is literally no where to put money. It is hard to buy durable goods, or to even procure services.

Other than developers mad, there just isn't a real need to hand wring over this.

[Mdcastle]

So, even if 2021 is "capital starved", what happens in 2023 when there's only so much capital to invest in either a rent-controlled city or a non-rent-controlled city?

[mplsjaromir]

Who knows? How that manifests would tell you what happens. Lower aggregate demand? Then who needs to raise rents far above 100 year averages (2.7%)? I think the city threaded the needle correctly with the figure specified. If a majority of Twin Cities workers suddenly started receiving COLA then maybe an untenable situation occurs.

At the end of the day St. Paul and Minneapolis have a product (central locales) that suburbs cannot replicate. Throw in that they are the only cities approaching walkable for 350 miles, house more than their fair share of those suffering poverty, those in need of social services, and refugees they should be more choosey.

If St. Paul follows its old patterns then it might be a bad move. A path of allowing more development per acre will make the city more enticing for developers. The city should also pitch itself a something unique and not easily replicable, not necessarily jaw dropping or a draw for gawkers from far and wide. Just human scaled and pleasant. Something that Minneapolis I think has largely achieved. Rent control can curtail the disingenuous NIMBY objections that new properties will just raise rents for long time residents, so it may make more ambitious fill in projects have less objections.

I think the city can use it as a force to make the city more desirable for residents, developers will have no real reason other than spite to ignore.

[bubzki2]

Rent control can curtail the disingenuous NIMBY objections that new properties will just raise rents for long time residents, so it may make more ambitious fill in projects have less objections.

I like this bit and I really hope you're right. Unfortunately, fixed income homeowners seem to be biggest opponents to things like the Lexington Alatus project for fear of increased values/taxes, more so than rents.

[datasage]

With the way the ordinance is written will result in the following things:

- Rent increases will always be 3% per year, since you cannot make up for it in a later year, you are better off as a landlord raising rent no matter what. Even if not needed on a down year.
- There will be significantly less incentive to invest in renovations of existing rentals units. At least anything beyond keeping the unit in code compliance. Which may have been in part at least some of the point.

Systematically rent control is being pushed as a solution for two different issues. Population growth, and growth in income inequality. If we don't want reduce population growth, we need to increase housing supply. Income inequality is very difficult to address at a local level.