What Critics Get Wrong about a New Housing Exemption from Rent Control

[A long-vacant lot on University Avenue.]

During the campaign over the HENS rent control ballot measure, I was perplexed about why an exemption for new construction was not part of the policy. Apart from the naive belief that rent control would not affect development, there seemed to be no positive justification for including it. 

Post election, I've heard an explicit rationale for not applying rent control to new construction, most recently during a panel conversation about rent control hosted by John Manillo's group, St. Paul STRONG. Here’s the best articulation of that in a Highland Villager editorial, from Jim Poradek of the Housing Justice Center. He writes:

When new construction is exempted, it can incentivize developers to tear down older buildings to start all over — reducing affordable housing stock and catalyzing displacement.

To be fair to Mr. Poradek, this kind of displacement is a legitimate problem in California, New York City and some other places. However, Saint Paul is different from those coastal cities in a number of important ways that, in my opinion, make this issue much less concerning. Because of these differences, the potential harms caused by any potential displacement remain far outweighed by the costs of bringing new housing construction to a halt.

Here are the key reasons why Saint Paul's potential policy would be different from those in California:

Rolling Window v. Fixed Date

In California and New York City, rent controlled housing was set by a firm date: for California, it's 1995, and for New York City, it's 1974. What that means is that, under those rent control policies, there was always a fixed, limited amount of rent controlled housing. Nobody was ever going to make any more. 

It also meant that the total supply of rent controlled housing in those places shrinks every year. Because of the lack of vacant sites, most new housing developments inherently come at the expense of rent controlled homes. For example, if someone built a 20-unit apartment building on the site of a 4-unit LA “dingbat”, it meant the permanent loss of rent controlled housing, even though it was a net gain of 15 homes.

This kind of policy explicitly pits housing supply against affordability, and leads the sort of toxic housing politics that are par for the course in expensive coastal cities. For nearly every new apartment building, YIMBYs fight with PHIMBYs over housing construction, all in the midst of a severe housing shortage and affordability crisis.

This problem is why, instead of a fixed date, almost all newer rent stablization policies, including the proposal from Mayor Carter, use a rolling time window to differentiate between rent controlled and decontrolled housing. In this case, it’s a 15-year window, meaning that any new housing built in Saint Paul would become rent controlled after 15 years on the market. This solves one of the big problems created by California-style rent control policies: each year there’s new rent controlled housing that becomes available, and any new housing built today will, eventually, fall under a rent stablization or rent control policy.

For Mayor Carter's proposal, specifically, here’s how that would look. Under a 15-year window, there would be about 9,000 uncontrolled apartments, the sum total of everything built in Saint Paul over the last 15 years. (By the way, that number is far too low!) Each year some of them would enter the rent control scheme even as more housing is built. For some context, that’s about 20% of the city’s total stock of 46,000 rented homes. 

But, unlike in New York City or California, that 20% number would stay fairly steady as new homes were built and entered into rent control. For example, in 2012 there were 729 apartments built in Saint Paul; these would become rent controlled apartments in 2027. In 2028, there would be 27 new rent controlled homes added, and 412 in 2029, etc. This kind of policy means that building housing is not a zero-sum game, and building new housing does not mean the permanent destruction of rent controlled homes in the city.

[This large apartment complex on the West Side would enter rent control in 2029.]

Housing Costs and Infill Potential

[Housing afffordability; MSP metro is 3rd from bottom.]

Believe it or not, housing costs in Saint Paul are not that high, from a national perspective. By contrast, the real estate pressure on the coasts is off the charts; comparing how real estate works in San Francisco and Brooklyn to Saint Paul is a bit silly. In those markets, the insane prices of land and housing create all kinds of perverse incentives that don't yet exist here.

For example, if developers could make vast sums of money tearing down existing apartments to build new ones in Saint Paul, they’d have been doing that for years. Apart from a few spots on Marshall Avenue, which were mostly existing single-family homes, demolishing apartments to build new, larger apartments is not that common. In nine years on the Planning Commission, it was very rare to see apartments being torn down for development; the O'Gara's project is the only case I can think of: 20 apartments replaced with 163 apartments.

That’s partly because we don't have out-of-control housing costs (though if we needlessly exacerbate our housing shortage, we might move up the rankings). There is a lot of unused land in Saint Paul -- parking lots, vacant lots, empty storefronts, little-used warehouses -- and if you want land for infill development, you have choices all over town. There are still vacant lots on Selby in one of the city's hottest neighborhoods, not to mention all along University Avenue or large parts of the East Side. 

Costs of Not Doing a New Housing Exemption

It’s pretty obvious by now that the concerns that myself and most housing experts had about a strict, exemption-free rent control policy were legitimate. Housing financing has vanished all across the city, as Mayor Carter and most of the City Council well know. The specific resolution language in his new housing exemption proposal are just one small example of this; for example, he talks about the impact on the city's Tax-increment Financing (TIF) districts, how non-profit developers cannot get financing. From everything I’ve seen so far (see this thread), it’s no exaggeration to think of the rent control ordinance as a de facto moratorium on new market-rate housing. 

Without the new housing exemption, we'll have little new housing supply. That triggers a cascade of problems that get worse every year. First, it exacerbates the housing shortage which will, more than anything else, lead to the erosion of rental housing in Saint Paul as owner-occupied prices quickly escalate. As the gap between rent controlled housing and owner-occupied housing grows larger each year, what’s to stop condo or single-family conversions, for example? Absolutely nothing, which is why we should be doing all we can to avoid making the city’s housing shortage worse.

[2022 housing construction in other cities; IMO St. Paul will be lucky to see 500 homes built in 2022, most of which will be highly subsidized.]

One report this week declared that 2022 is going to be a banner year for new housing construction across the country. With a new construction exemption, we could be seeing thousands of new, unsubsidized apartments rising up across Saint Paul right now. Instead, we are likely to see a number that's very close to zero. New homes built in the East Metro will be in the suburbs, places without meaningful transit or walkable neighborhoods, and with far larger carbon footprints. It also means little to no growth in the city’s tax base, which upends the Tax-Increment / Affordable Housing financing balance in the city. 

In short, the potential problems with new housing exemption are based mostly on logic that applies only in expensive coastal cities with antiquated rent control policies, and are not very likely in Saint Paul under Mayor Carter's proposal. Meanwhile, the costs of not having a new housing exemption on the books are real and immediate, and are already harming Saint Paul housing supply, overall affordability, climate action, and the city's bottom line. 

This problem is not going to magically disappear. The sooner that the City Council and Mayor can agree to pass a new housing exemption, the better.