By HUD counts, St. Paul’s apartment construction permits fell 48% after rent control. Was it temporary?

Frederick Melo, Pioneer Press
·8 min read

National apartment construction hit record highs last year not seen since the early 1970s, but the same did not hold true in Minnesota’s capital city.

When it comes to construction of duplexes, triplexes and other forms of multi-family housing, St. Paul’s building permits plummeted by 48% last year compared with the year before, according to HUD, the federal department of Housing and Urban Development. The numbers of permitted units ended the year roughly on par with the city’s 10-year average, which was weighed down coming out of the Great Recession a decade ago. That’s fair, bad or really bad, depending upon how you slice it.

Minneapolis, on the other hand, registered an average to above-average construction year, with a 16% increase in permitted multi-family housing units from the year before. That’s fair, good or really good by the same standards.

“The slowdown is real,” said St. Paul City Council member Chris Tolbert, who chairs the city’s Housing and Redevelopment Authority. “I think St. Paul has got some work to do to regain our momentum.”

Next few months could be telling

Overall, new multi-family housing construction was more than three times busier last year in Minneapolis than in its sister city, with 3,626 units permitted in the bigger twin compared with 1,072 units in St. Paul. The capital city hasn’t kept pace with Minneapolis in terms of housing construction in recent history, so the gulf between the two cities is nothing new, but it loomed larger than usual in 2022.

Opponents of rent control have been quick to point out a key policy difference between the two cities. St. Paul voters approved the city’s first-ever rent-control policy at the ballot box in November 2021, a strict 3% rent cap that was later loosened by the city council last September, with the mayor’s blessing, to exempt new development for 20 years.

Could sluggish rental housing growth in St. Paul be a temporary market reaction, and if so, is it over? The next few months could be telling, but some urge caution in interpreting the numbers.

“We are not prepared to make generalizations about the housing market with an appropriate degree of confidence based on a relatively small number of datapoints that have been generated since the two different versions of rent stabilization have been adopted or gone into effect,” said Crystal King, a spokesperson for St. Paul’s Department of Planning and Economic Development, or PED.

St. Paul officials doing their own analysis of building

Officials with PED are doing their own internal analysis of recent building permit activity and they caution that HUD data tends to differ from their own, in part because HUD doesn’t count commercial-to-residential conversions, which are not uncommon in downtown St. Paul.

“Housing construction most likely slowed somewhat in the months after the passage of the initial rent stabilization ordinance, but nowhere near as much as the HUD data suggests,” King said.

Another discrepancy: HUD counts the last building permit needed to make a structure occupiable. The city, on the other hand, counts new development as soon as a permit is pulled for a project’s footings and foundation.

A case in point would be the 304 units of housing dubbed “Lexington Station” under construction on Lexington Parkway near University Avenue. While the footings/foundation permit was issued on Sept. 19, HUD wouldn’t count the project until March 13 of this year.

At 150 W. Water St. near Harriet Island, the new Farwell Yards project will create 221 new apartments. While an initial construction permit was issued Feb. 10 of this year, “it won’t be counted for some months in HUD’s data, even though the city would have counted it in our internal counts,” King said.

In addition to exempting new construction from rent control, St. Paul has allowed landlords to self-certify 8% rent increases, if justified by documented expenses showing the need for a consistent return. Landlords can seek permission for even larger rent increases of up to 15% through a public hearing process at City Hall.

As St. Paul officials worked out that policy over the course of last year, many housing developers put key projects on hold in the capital city or gave the city a cold shoulder, with some saying their hands were tied by the lending market.

“The reason for development slowdown is probably multifaceted, but I do feel it had a lot to do with the rent control in St. Paul, especially with out-of-state investment and the apprehension that caused with the market,” said Stefanie Sokup​​​​, marketing director with Minneapolis-based developer Schafer Richardson, in an email. “Of course, interest rates played a part in the slowdown as well.”

Some developers back at the table

Some — but not all — developers have since come back to the table. After a long pause, Alatus, for instance, found new major investors to serve as limited partners and resumed apartment construction at Lexington Station. At Highland Bridge, Weidner Homes has not.

“I think rent control’s had a chilling effect on our economic development,” said Tolbert, who represents the Highland Park neighborhood where Highland Bridge is located. “You add on inflation, cost of building materials, and the uncertainty of the economy in a way we hadn’t seen in prior years. All those things together had an impact on our housing numbers.”

Tolbert is cautiously optimistic that building activity will pick up again now that the development and financing community better understand how rent control is structured in St. Paul and who is eligible for exemptions, which was all up in the air before the city council’s amendments last fall.

“The lack of surety — ‘What does this mean? How does this work? How is this going to affect my numbers?’ — and then you add on that the mayor and the council, including myself, said let’s amend this, they said let’s let this play out before we put $60 million into a project,” Tolbert said.

Four city council members who openly opposed taking rent control to public ballot in 2021 — Tolbert and council President Amy Brendmoen, Jane Prince and Dai Thao — are not seeking re-election in November. That means a majority of the seven-member city council will turn over next year, which could lend itself to future amendments.

Council member Mitra Jalali, a proponent of rent control, said she doubts any major changes to rent control will be enacted before the new council is seated, and she looked forward to helping guide future discussions.

Rent-control advocates react

St. Paul has seen construction activity diverge from and be overshadowed by its sister city before, beginning long before rent control was in play. In 2017, for instance, the number of multi-family housing units under construction in Minneapolis was eight times greater than in St. Paul.

Other factors, such as rising interest rates, availability of developable lots, concerns about crime, remote work and the pandemic in general also factor into whether developers are ready to pull the trigger on one location over another. And some rent-control proponents emphasize that any market recoil against the capital city’s version of rent control could be temporary.

Overall, “2020 and 2021 were particularly strong years for permitting activity in St. Paul,” said Monica Bravo, executive director of the West Side Community Organization, whose members pushed hard for rent control. “2022 was closer to an average year based on development trends over time, but there are also a fair number of developments that are in various stages of planning.”

Critics continue to argue that rent control has taken the wind out of the sails of housing construction, undermining the very intent of price controls by reducing the supply of new housing coming into the market. They fear the loss of affordable units that would have been constructed alongside market-rate units, either within the same multi-unit development or side by side through tax subsidy arrangements.

“We’ve got to build a lot more supply,” said Neel Kashkari, president and chief executive officer of the Federal Reserve Bank of Minneapolis, during a March 30 forum at the Wilder Foundation in St. Paul.

Kashkari raised concerns about regulatory barriers limiting real estate development, from minimum lot sizes to minimum number of bedrooms, including rent control.

“High prices come first, and then people get upset about it, and they say we need a rent control to stop them from going higher,” said Kashkari, responding to questions posed by Anne Mavity, executive director of the Minnesota Housing Partnership. “It’s kind of a trap. … You say, ‘Well, we’re going to adopt rent control to try and put a lid on it.’ And then you’re stuck. … It’s such an inhibitor to new supply coming online.”

“If we actually want to move the needle for working-class families across Minnesota, we need to unleash a lot more supply,” he added. “And every policy that I would look at, I would judge on, ‘Is this going to help supply or not?'”

HUD data shows a tale of two cities

When it came to building multi-family structures — think of apartment buildings with two units or more — Minneapolis enjoyed a relatively productive year in 2022. St. Paul did not.

HUD’s multi-family housing building permit data shows developers pulled permits for 3,626 housing units in Minneapolis last year, which keeps pace with the city’s five-year average and is several hundred units above its nine-year average. The pace of construction picked up about 16% in Minneapolis, or 500 units, last year compared with the year before.

In St. Paul, developers pulled permits for 2,043 units in that category in 2021, compared with 1,072 units last year, which is several hundred units below the city’s five-year average and about on par with the city’s nine-year average.

Year over year, that’s nearly a 50% decrease in construction activity.

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