2021-10-14

Notable Quotes #26: Gordon Parks describes Life on the Streets of Rondo, c. 1927

It was all behind me now. By the next day, there would be what my mother had called "another kind of world, one with more hope and promising things." She had said," Make a man of yourself up there. Put something into it, and you'll get something out of it." It was her dream for me. When I stepped onto the chilly streets of St. Paul, Minnesota, two days later, I was determined to fulfill that dream...

[My sisters house,] It was a nice house — two-storied, handsomely middle-class, with large comfortable rooms. And that night, lying in bed, I marveled at the hundreds of deer leaping the bushes on the wallpaper around me, and my thoughts were charged with vague imaginings of the future. Yet I felt that whatever security lay ahead would be of my own making. There was no feeling of permanence in the softness of the ornate bed. I sensed that this was to be an uneasy stopover, and that it owed be necessary to move on before long...


I awoke early the next day dressed and went out of the doors, eager for a look at the new surroundings. The morning was already brisk and alive, with sunshine full upon the big porch. The tree-lined avenue seemed clean and beautiful. The leaves, yielding to the first frosts, had taken on the golds and oranges of autumn. Stretching full length upon the steps, I was suddenly thankful to be in this bright new land.


People were now on the street, moving with the quickness that autumn mornings enforce. I thought that I too would have to move much faster here; otherwise I would be left behind. Maggie Lee had made pancakes and sugar for breakfast. We ate quietly, this three of us; then my brother-in-law, a Pullman porter, went away for a week — the only week that I was to know happens in this house.


I enrolled in Mechanic Arts High School, and got an evening job bussing dishes in a diner, where I was paid six dollars a week and given one meal a day. My brother-in-law took two of this for my rent and meals, yet the four dollars left seemed adequate. It was more than I had ever had at one time in my entire life. The new friends I made kidded me about my country mannerisms and dress, my shyness with the girls and my “Kansas talk.” But when basketball season came, my status grew. 


Real winter came one Friday just before Christmas. A hungry north wind knifed down like a hawk. By seven o’clock that night, the temperature had dipped to ten degrees below zero.


….


After the pool hall closed, I rode trolley cars back and forth to the ends of the line between St. Paul and Minneapolis, sleeping most of the time, using my suitcase for a pillow, waking now and then to the sound of snow and sleet pelting against the trolley windows. I was aware of people getting on and off at different stops, noting that they had someplace to go, knowing that I was only riding out the night. Once when I awoke, the car was empty and dark, the doors were open and wind and snow swept in from both ends. I sat up, rubbed frost from the window and looked out. Except for the falling snow, there was nothing — no trees, lights or landscape. The car seemed suspended the stormy blackness. Again I rubbed briskly at the window, and then there came a sputtering of bluish-white light. The trolley operator was swinging the contact pole to the power line from where it had slipped. The lights came on, and a railing came into view. We were on a bridge, high above the Mississippi River.


I rode the trolley between the Twin Cities for several weeks. The rent was reasonable, and there was always some heat. My food for those days and nights was the single meal I got at the diner, eked out by hot dogs and root beer.


[From Gordon Parks' amazing autobiography, A Choice of Weapons. Parks moved from Kansas to St. Paul at the age of 15.]


[Rondo Avenue streetcar, c. 1947.]


2021-10-13

Mayor Carter Charts a Third Way on Rent Control in Saint Paul

[Mayor Carter at last night's Mayoral debate.]

From the beginning, my biggest frustration with
the HENS rent control proposal is that it put Saint Paul voters between a rock and a hard place. On the one hand, as I first stated, the details of the proposed ordinance make for terrible housing policy for all the reasons I’ve been explaining. On the other hand, limiting rent increases would help lots of people and it just feels wrong to vote against it.

Balanced those two things had become a really difficult choice for lots people around Saint Paul, including many of the Council Members who were forced to answer “yes” or “no” to supporting the HENS rent control referendum as-written. But yesterday, the Mayor tweeted a statement that, for me, changes the situation.


His very short tweet was basically a “yes, and…” It’s a stance that helps me breathe a sigh of relief in what had become a very frustrating situation with few good outcomes. While I still think there are some unknown legal hurdles, how this debate is playing out illustrates the difference in process around how Minneapolis and Saint Paul handle difficult policy problems. 


Parsing Semantics


To re-cap what elected officials have said: Council Members Jalali and Yang have said that they support the rent control ordinance, with Jalali in particular cautioning that “we can have some revision after a period of time.” Meanwhile, Council Members Brendomen, Prince, Thao, and Tolbert all said they do not support the rent control ordinance, citing to varying degrees problems around new housing and unintended outcomes. Meanwhile Mayor Carter had remained cryptic, indirectly saying he was “studying it” through a spokesperson.


Well, that changed yesterday.





It sucks to parse a Mayoral tweet as if he’s a Federal Reserve Chairman, but in a way, he kind of is and that’s what we have here. The key part of Mayor Carter’s Tweet IMO is the following clause: “we can and must make it better, quickly”.


Those eight words say a lot! Here’s how I read them:

  • we can [change it]…” = I am working with the City Attorney and think there is a path to amend this policy without too much trouble.
  • … and must make it better” = there are specific details in this policy that I don’t agree with and don’t support. I am committing to changing them.
  • "quickly” = I’m not going to wait around and leave it on the books for a year or two to see if it “works”; instead, we’re going to change this policy as soon as we legally can.


The last word “quickly” is doing a lot of work. You don’t stick a dangling adverb into your carefully-worded Tweet unless you mean it. I think Mayor has a plan to act as soon as legally possible to change this policy. (My wild guess would be that he tries to amend the ordinance before it would be enacted in June; but for purely legal reasons, it might also mean next November.)


This is likely all we have to go by. Unless I’m wrong, I doubt the Mayor will clarify unknown details before the election. During last night's League of Women Voters debate, he kept calling the policy proposal a "first draft" and "a start", and specifically mentioned new construction as a provision that bothers him, but did not say anything more specific. For Mayor Carter, there’s little to be gained by elaborating before November.


Trust, Legal Hurdles, and Process 


It’s a relief to hear that there’s a plan for changing this ordinance, and that proposed policy won’t be on the books for very long (if at all). I think that the Mayor, who will be easily and justifiably re-elected, has a lot of leverage, even more so after he’s said he will be voting “yes.” With the majority of the City Council on the record opposing the rent control ballot measure as-written, there should be few hurdles to changing the problematic details as much and as soon as they legally can. 


(More on that in a second.) 


I also trust Mayor Carter on housing issues. From the beginning of his campaign four years ago, he has been a strong supporter of pro-housing approach on the Ford Site. His recent, controversial veto of the Lexington Parkway development denial shows that his office has a good grasp over on-the-ground housing debates in Saint Paul. In short, if he says to trust him, and that his changes to the policy will work out, I’m inclined to believe him.


One frustration I’ve had about the rent stabilization/rent control debates in the two cities resolved around process. Over in Minneapolis, they’ve been studying rent stabilization for years. If Ballot Question 3 passes there, they’ll have an in-depth public hearing process process where city officials, staff, and members of the public debate and weigh in on all kinds of critical questions.


Meanwhile, in Saint Paul, we have nothing but anecdotes. There’s not even rudimentary information available on what the problem is and how different kinds of policies might work.


For example, here are things we don’t know:

  • How fast are rents going up, in the short- and long-term?
  • How many apartments would be affected by a 3% cap?
  • Where are prices rising faster or slower?
  • How many “corporate landlords” are there in the city?
  • How many small-scale or BIPOC landlords are there in the city (e.g. someone who owns a duplex and “rents" it to a relative)?
  • How many variance requests would the policy generate each year, depending on inflation, taxes, etc.?


Of course, I can think of lots more questions, but that's some very basic stuff!


Should the referendum pass in Saint Paul, I imagine that the Mayor will task City Staff to figure these questions out and tailor policy changes based on what they find. That’s important, because having the city’s housing policy experts use actual data on rents, and research about the pros and cons of  critical details, is a necessary and missing step. 


[This is the big legal hurdle that's still out there.]


But the other wrench I have to cautiously throw into the wind: the lawyers might win in the end. 


The ALEC-written, rent control-preemption state law is still there on the books at the State Capitol. It’s never been tested in court AFAIK. I’ve read all the relevant statues — the state law, the city charter, and the HENS ordinance — and to my eye, it is not clear if and when the City can change the ballot-approved policy. A lot depends on the legal differences between “repeal” and “amend,” or between “enact” and “renew.” Nobody knows what a judge will decide about that, especially if it’s this guy again.


For example, Minneapolis City Attorney’s office has cautioned their City Council that the legal issues around rent stabilization ordinance are vague. That’s why they have “strongly suggested” that the voters decide on, not one, but two ballot measures: the first to grant “permission” to have a policy (which is weird), and the second so that voters have a chance to approve the specific details of that policy. What this tells me is that the Saint Paul “process” here will be litigated, and likely by the same group of MHA-backed attorneys that defeated the City soundly on the tenant protection ordinance.


I don’t think anyone should be sanguine about the legal situation, and there’s still a very good chance that this whole thing is thrown out in court and renters facing steep rent hikes are left with nothing. I guess we’ll find out. 


But if it works out, much like the contrast around policing and reform, Minneapolis will be going through a drawn-out and contentious public process while Saint Paul will be hopefully crafting a good (maybe even better?) policy, without much fuss, in a back-room kind of way.



TL;DR - TBD


Mayor Carter changed the conversation last night. If you read behind the lines in his tweet, he pledged to quickly change the proposed policy, and seems confident that he can find a way through the legal hurdles. We don’t know what the details will be, but I trust Mayor Carter on housing.


In short, the Mayor’s “yes, and…” tweet comes as a relief. Unlike before, where Saint Paul voters were forced to choose between two bad situations, I look at this ordinance now as the functional equivalent of the one in Minneapolis, which I’ve supported from the beginning: we don’t know what the details will be, and I believe City Staff and elected officials can sort it out. If done right, and I’ll post in a few days what I think that means, Saint Paul can lead the way on addressing the housing crisis, climate change, and a whole bunch of other critical municipal pickles.


[See also my short column in Minnpost about the Saint Paul ordinance and my long-read with all the research about how this rent control proposal affects housing in Saint Paul, an explainer of why a 3% rent cap blocks new housing construction, short posts on how the policy would affect rents and taxes, and interviews with housing policy experts on new construction and rent control.]

2021-10-11

Four National Housing Experts on Rent Control and New Housing Construction

[A debate about rent control and new housing.]

Seeing as there's some confusion about whether or not a strict rent control policy that applies to new housing will affect the construction of new housing, I took the liberty of reaching out to people who study this stuff for a living. I think that, when it comes to deciding whether or not the proposed Saint Paul rent control policy will help or hurt people in the city, this is the critical piece of the puzzle.

So I wrote a bunch of national researchers and institutes on housing policy to ask them the following question:

Why have rent control policies not applied to new housing in the US? Are there historical or theoretical reasons for this? 

Four people got back to me, and here's what they said:

#1. Jenny Scheutz, Brookings Institution. 

Rent control/stabilization programs almost always exempt newly built housing, because capping rents on new apartments would be a huge disincentive for new construction to occur (e.g. would hurt overall housing supply). Applying caps to rent increases on older buildings (usually 20+ years) is less of a disincentive, because the property owner is presumed to have paid down the mortgage and recouped returns from the initial construction/acquisition costs. The only way you can encourage new construction and simultaneously cap rents is to provide public subsidy (either to developer, property owner, or households).

 

One exception is inclusionary zoning programs, which you can think of as partial rent control on new construction, but the owner is expected to cross-subsidize the below-market units with higher rents on the market-rate units.


#2. Mark Treskon, The Urban Institute 


Q: So why doesn't rent control apply to new housing? Is it theoretical or economic or political, or what?


There are theoretical reasons, but there are also just small ‘p’ political reasons too, in that it doesn’t apply to new housing in particular because, if you’re looking at local politics, and people interested in local policies and zoning and new construction, developers are a big part of it. Anything that would potentially affect the ability of developers to charge costs appropriate for the market are very heavily pushed back against.


That’s one side of those things. [Then] there is an idea that if [rent control] applied to new housing, it would limit new housing construction. That’s traditionally been a big worry, even outside of the the "developer special interest", that by applying rent control to new construction, you’re going to limit developers, limit them engaging in new construction. Or [developers] will look only at the condo market. 

So there are two sides of that coin, why it hasn’t applied to [new construction].


#3. Brian Asquith, the Upjohn Institute

Q: Why doesn't rent control apply to new housing? Are there theoretical reasons for this, or historical reasons, or both? 


It’s a mix of politics and economics. Basically the high economics reason is that you don’t want to discourage new development. So in the bad old history of rent control  New York City famously had it, and a bunch of European cities had hard rent control after WWII. It was universally agreed that it mostly didn’t work. It was too inflexible and it discouraged developers from building new housing. This was during the baby boom, so they needed a lot of new housing.


In the 70s, when rent stabilization came to in play, they consciously tried to avoid the mistakes of RC by saying, before this point the building will be controlled, and after this point they won’t be controlled. It is supposed to send a signal to developers that they can build without worrying about their buildings being brought into the control system.


Q: Are there any examples of applying rent control to new housing? 


So both Oregon and California recently passed rent stabilization statewide laws. Probably double check this…. My recollection is that Oregon law has a rolling inclusion date; for the stabilization system, they exempt buildings 15 years or younger. Once they hit year 15, rent stabilization applies. 


Basically my judgement as an economist, based on my work and other people’s, is that the concern that policy makers have, that they will be disrupting new development, is a valid one. [For] the price of a building, one way to generate a market price of the building is to calculate the present value based on the rent flow in perpetuity. If you’re effectively stating from the get go that the rent flow of cash will be discounted or capped in some way, it will lower the price, and by lowering the price, it will make more developers say that it’s not worth it. I don’t think new supply will go to zero. Minneapolis and Saint Paul are a growing metro area, but on the margin it will probably discourage new development.


It depends on the details of the policy. The new California law is pretty loose. The rental increase cap is like 8%. Most people in most cases are not seeing 8% annual increases in rents even in California  So, if the folks in Saint Paul or Minneapolis had a relatively high cap, like 8 or 10%, it would probably cut down on most egregious increases without getting in the way of most landlords' normal course of business. But the devil is really in the details…


I would say that while correlation isn’t causation, it is interesting that New York City, DC, San Francisco, and Los Angeles have all had rent control for 50 years but are hardly synonymous with affordable housing. One might start to wonder whether rent control is helping or hurting. Generally if you institute a policy for 40 years that’s supposed to make renters affordable, and it doesn’t… well… 


But these systems aren’t going anywhere. They are very popular.

Well, should I say something positive about the policy?


A: Sure. Feel free!


If you are a tenant who is lucky enough to be living in one of these units when it switches to rent control, then there are benefits for people. They do save money relative to what they would have had to pay. That can have some benefits, though some don’t entirely believe it… 

Economists are very down on rent control. It’s not all downside, but it's definitely a policy that has a bad reputation among people who study it, like myself, for some very well-founded reasons. 


#4. A Professor at a Well-known University-affiliated Housing Policy Institute

The fourth person agreed to talk to me on background, because they didn't want to comment directly on a pending ballot question. In a way, it was the most interesting conversation because this person has experience in the finance industry. They agreed that, to answer my question, they would wear their "banker hat".


I asked them why rent control policies didn't apply to new construction. 

This person explained that, from the financing point of view, lenders provide some buildings with 30-year mortgages, but that for commercial buildings it’s often likely to be 10 years or less. After that, they'll keep refinancing the property. Especially if they're going to provide longer term financing, they need to have some comfort that the economics of the building will be sufficient to pay back the loan. 

They explained that one key thing banks look for in underwriting loans is sufficient cash flow, using a ratio called the "debt service coverage." The lender wants to make sure they're not lending to a building that can’t "throw off" enough revenue, based on assumptions about rents, the costs of running the building, taxes, etc. They look at the net operating income and make sure that it's at least some multiple of the debt service. 


The example they used, which were made-up numbers: if a building has $100 a month in debt service, it needs to generate at least $130 a month in income to meet a 1.3 ratio of the debt service coverage. 


This person said that in a world where expenses are going up all the time because of inflation, if they don’t know that the rents are going to go up to cover that, they're not going to lend against the building. It’s that simple. 


They said that lenders want loans, and that the pandemic offers another example of a possible problem. If there’s not enough money to pay the debt service, the last thing the bank wants to do is take the building as collateral. Banks hate it when they have to take the building because the property owner goes bankrupt.


The person told me that "banks don’t take risks, banks manage risks." They take your money, and if you want it back as deposited, they’re lending it out in a way that they think they'll have a good chance in getting it back. 


In sum: if they don't know that they'll be able to raise rents when the costs go up, they’re not likely to lend to that building.

Well, that's what I heard from people who study this stuff. Housing policy people are pretty consistent about the connection between this strict rental regulation and new housing construction.


[See also my short column in Minnpost about the Saint Paul ordinance and my long-read with all the research about how this rent control proposal affects housing in Saint Paul, an explainer of why a 3% rent cap blocks new housing construction, and short posts on how the policy would affect rents and taxes.]

2021-10-07

Saint Paul's Last Real Drive-in Peels Out

The Star Tribune reported some sad news this week, that the city's last real proper order-at-a stand and eat-in-your-car drive-in on the East Side.
"It's exciting but it's sad," [said] third-generation owner Angela Fida. "It's exciting because I'm going to start a new chapter in my life, and it's sad because I've been here for so long."
I've been going to the Dari-ette off and on over the last few years for their coney dogs, and I usually got the sense that the place was on its last legs. The vibe was subdued, no flocks of kids with ice cream cones, mostly people driving in and out 

You'd think that an eat-in-your-car outdoor-seating joint could thrive during COVID, but maybe the Dari-ette was different. Well, it was certainly different! As far as I know, there is only one other proper old-school drive-in in the Twin Cities: the Minnetonka Drive-in off Highway 7 (and the great bike trail). 

The closing of the Dari-ette is certainly a loss for Saint Paul history, and another vanishing landmark of the old days on the East Side. It's not that people stopped going to drive-thrus or even food trucks, but it stopped being a social thing in this particular way. We're too bubbled up now to appreciate the spectacle of high school kids bringing out your tray and gawking, or else most people just don't appreciate red sauce Italian fare like they used to. 

The coney dog was fine, by the way. The review is appended below. Mostly, it was the atmosphere that was the treat at Dari-ette, even if it was just a parking lot with some vintage kiosks illuminated by a cool neon sign. I'll miss knowing it was there.

[Coney guide continues:]

The unique Dari-ette lies deep in the East Side, and is the last pure “drive- in” in Saint Paul. In fact, it’s almost the last in the Twin Cities, with usually-functioning car-window menu/speakers/tray-holders. What an amazing slice of mid-century car culture!

The operation was founded in 1951 by Italian entrepreneurs who have passed down through the generations, nobody changing a thing. It’s open from spring to fall and thrives on the labor of teenagers, and if you find yourself up on the East Side, is surely worth a visit.

The menu is old-school Italian fare with ice cream, classic sandwich and burger staples. And lo and behold - the Dari-ette’s extensive menu even includes a coney dog: it’s below-average, with a solid wiener and sauce but not much else to speak of. Anyway, that’s not the point. You’re eating a coney at a drive-in! 

So long, Dari-ette! May you drive off into the sunset. 

[A coney dog and an egg salad sandwich.]


[The Dari-ette at dusk.]


[The Dari-ette in the old days.]


[The menu; most of them were still functional.]


2021-10-05

What Would the Rent Control Policy Do to Saint Paul Taxes?

[Melvin Carter announcing the 2018 levy increase.]

A lot of people care about taxes, and in Saint Paul the increases have been significant lately

For some context, the property tax is not the greatest tax in the world -- it's less regressive here in than most other places because of the state's Property Tax Refund. (Renters can qualify for this too, but there are a lot of hoops through which they must jump. I am guessing that most renters who qualify do not receive the tax break.) 

What I mean is that the property tax is not great, especially when compared to the income tax. That's why, historically, Minnesota has relied on one of the strongest anti-property-tax policies in the country: the local government aid (LGA) funding system. The problem is that LGA money, state aid to cities meant to keep property taxes lower, has has been eroded by years of Minnesota Republicans having their way. (I know this because I used to write a lot about it when Tim Pawlenty was governor.)

The problem is that, other than fees, property taxes are the only real way Minnesota cities can pay for anything. Especially in an era where LGA is scarce, property taxes are what Saint Paul relies on to fund things like libraries, road maintenance, equity programs, and just about everything else. If Saint Paul wants to be able to afford these things, it must either raise property taxes or grow the tax base.

So that's the challenge: how does the rent control proposal affect this situation?

[Zillow map of homes and duplexes for sale in Saint Paul.]

Tax Base Impact via Rental and SFH Values

If you talk to landlords, they'll tell you that the value of their apartment properties will drop if the rent control policy is approved. 

For the purposes of this exercise, I guess I don't care that much about this issue. Relative decline in value for apartments is not a problem until maintenance goes down and the housing becomes poor. Theoretically, the city's Department of Safety and Inspections is on top of that. 

I'm not really worried about this for tax base purposes because I also think that, if rent control passes, owner-occupied housing values will continue their rapid increase as higher-end apartments become scarce. On the one hand, this will put home ownership farther out of reach for working class and BIPOC people, but on the other hand, it'll help the tax base. 

Basically, I think that those two factors will roughly cancel each other out, though it will be a shift of the property tax burden on to single-family homeowners.

[New apartments under construction in Saint Paul.]

Tax Base Impact via New Construction

The real impact, to my mind, comes from the lack of tax base growth that comes from the de facto ban on unsubsidized new housing.

As I wrote in my original long blogpost on the rent control proposal: 

This all gets back to what the goal is: do you want to “stabilize” rents and make them more predictable for vulnerable renters? Or do you want to “control” the (entire?) rental housing market and use city ordinance to set prices for apartments? 

This distinction becomes especially important as it applies to the effects on the housing supply. As written, the HENS plan would stop new market-rate housing construction in Saint Paul. Even coming from a pro-rent-control perspective this seems like a bad thing. This is why I hate the fact that the HENS policy pits helping renters against building housing, because I think both of these things are very important. 

I think STP is on track to add at least (!) 2,000 new homes per year for the next 5 years. I’d like to see that number higher, but that’s a good ballpark. Not all of these new apartments will be unsubsidized and on the tax rolls (i.e. not in a TIF district LINK), but a good percentage of them will be. I would hope that number was around 2/3. 


Because of the way it's written, the HENS rent control policy will stop a large portion of this housing from being built in Saint Paul, at least half and probably more. 

What does that mean for the tax base? 

[Saint Paul vs. Minneapolis housing.]

To make it easy, let’s say that the rent control policy stops 1,000 homes each year from being built in Saint Paul. I think that’s a realistic and conservative scenario. That's a huge difference in the city and county tax base. I dug into the numbers, and it usually takes a few years for the property (and taxable) values of a new apartment building to kick in. Sometimes it's right away, other times it's spread out over a few years. But once it does once it does, those new buildings pay huge amounts of property tax year after year. 

For example, here are five existing unsubsidized multi-family buildings across a range of places and times, along with their property tax revenues. I tried to choose a mix of places, but to be honest, there aren't that many examples of few-year-old housing complexes in the city! 

I also compared each building with a nearby undeveloped property of a similar size.


  • 360 Spring Street (Upper Landing) 2 acres; around 200 homes
  • $37.5 million valuation; $706,000 in 2021 taxes
  • COMP PROPERTY: 1.9 acres; $21,000 in 2021 taxes



  • 2700 University Avenue (building on border) 1 acre; 248 homes (student-oriented)
  • $9.5 million valuation; $102,000 in 2021 taxes
  • COMP PROPERTY 1.5 acres; $46,000 in 2021 taxes



  • 808 Berry Street (Franklin Avenue) 3.5 acres; 267 homes (30% affordable)
  • $53 million valuation; $864,000 in 2021 taxes
  • COMP PROPERTY 3.2 acres; $64,000 in 2021 taxes



  • 84 Wabasha Street (West Side Flats) 1.6 acres; 178 units (mixed-use)
  • $41.9 million valuation; $735,000  in 2021 taxes
  • COMP PROPERTY; 3 acres; $94 [sic] in 2021 taxes


  • 202 West 7th Street (by Xcel Center) 1.6 acres; 191 units (mixed-use)
  • $65.7 million valuation; $1,300,000 in 2021 taxes
  • COMP PROPERTY 1.25 acres; $40,700 in 2021 taxes


The total here: the 1084 recently-built homes generated $3,707,000 in property taxes in 2021. 

Meanwhile, the comparable undeveloped properties paid $53,894.

That's a net increase to the city and county of well over $3.5 million, which gives you a general ballpark for how much money Saint Paul will be leaving on the table each year by not building new apartments any more. 

The kicker is that this happens every year, so that the difference builds up over time. That's around $3.5 million of lost revenue the first year, plus an additional $3.5 million the next year, and so on. By the time you've reach Year 5, you’re talking about over $15 million a year of missing city and county revenue that could have been on the tax rolls. 

(Keep in mind this is a conservative estimate, and I'd guess the actual figure would be twice as large.)

For some context, Saint Paul’s 2021 6.8% increase in the tax levy was worth about $10 million for the city. This means that the de facto ban on new housing will have a huge impact on the property tax rates in Saint Paul and Ramsey County. 

Again, this is a conservative estimate. If Saint Paul achieved Minneapolis-level rates of housing growth, you should double or triple this number.

[The Oakland, California rent adjustment program website.]

Administrative Overhead

Meanwhile, the cost of administering the program could also be significant. A lot of this depends on how the City Council and Mayor’s Office administer the problem, i.e. how they set up regulation, education, inspections, etc. 

The Oakland example that everyone cites, is quite a top-heavy model. In that case, you’d expect the city to be spending about $3-4 million a year, with staffing levels around the same as the city's existing Department of Human Rights and Equal Economic Opportunity.

Alternately, like Oregon (apparently), the city could decide to do nothing to administer the program, and instead rely on individual litigation to handle it.

We should probably assume that Saint Paul will run its program on the cheap, but if you split the difference, they'd have to pencil in a few million dollars into the city budget for let’s say 8-12 new full-time staff.

[File photo of a Saint Paul pothole.]

TL; DR:

The point is that the overall tax swing under rent control would very significant, millions of dollars each year in lost revenue and increased overhead. And the difference grows dramatically wider annually, as housing is built elsewhere instead of in Saint Paul, until you're talking about a huge gap between a city with rent control and one without.

This matters because Saint Paul is not wealthy. I've sat through Public Works' presentations showing the long-term projections about crumbling streets, and how much we need to spend just to keep the potholes from growing exponentially. Meanwhile, each year we struggle to keep rec centers and libraries open. 

Growing the tax base is the best way Saint Paul can increase its ability to pay for basic services. That's why it's a big problem that this policy prevents that from happening. Instead, either property taxes will go up or cuts will come from somewhere.

[See also my short column in Minnpost about the Saint Paul ordinance and my long-read with all the research about how this rent control proposal affects housing in Saint Paul, an explainer of why a 3% rent cap blocks new housing construction, a short posts on how the policy would affect rents, and interviews with housing experts on the affects on new construction.]

2021-10-04

What Would the Rent Control Policy Do to Saint Paul Rents?

[An apartment building in Frogtown.]

If you read supportive narratives about the proposed Saint Paul rent control policy, depending on who you’re talking to, it will might have very little effect on most apartments — so little, that developers and landlords will barely even notice it — or it will usher in a new era of city-wide affordability that will decommodify housing and bring and end to centuries of real-estate capitalism.

Both of those things would be amazing, but consider me skeptical that either is a possibility. How rent control will affect housing lies somewhere in the middle, and it will be messy.

One thing I haven’t actually seen is any actual Saint Paul rental data. 

Here are a couple questions I have: 

  • How bad of a problem is rent gouging in Saint Paul? 
  • How many properties would be affected by a 3% cap? 
  • What will it mean for the larger housing market? 

So far, the only way to get a handle on this has been to look at the detailed CURA report on rents in Minneapolis, which is, to be sure, a different city. But Minneapolis and Saint Paul are in the same regional housing market. The two cities should fluctuate and trend roughly in parallel.

[Long-term Minneapolis rent trends, with 10%-90% distribution.]

[Long-term rent growth by neighborhood.]

[Minneapolis rents v. income.]

[Advertising rents for vacancy units, change-over-time, that includes the 2020 downturn.]

If you read through CURA's lengthy study, you see there's a lot of variability. For one thing, rents go up and down. (This might seem weird to anyone who's been a long-term renter; I've never once heard of anyone having their rent lowered.) In the end, though,  the data is clear: on the aggregate, rents are rising faster now than they have been historically, and thanks to our deep levels of racial inequality, it's a problem for working class and BIPOC folks.

This is the chart that makes the Twin Cities housing affordability problem very clear to me:


[This gets at the housing problem: rising rents combined with steep racial inequality. Zoom in and look at the income levels.] 

 

Tony Damiano’s recent Twitter thread has a nice summary of the situation. (Please note that he also admits that Saint Paul’s plan would be a “notable exception” to every other RS and rent control policy in the country.)

The CURA study on rent trends is solid, but Minneapolis is, in fact, not Saint Paul. They are actually different cities! The border is either the Mississippi River or Emerald Street. There's no overlap.

For example, I wrote a few years ago about how rent trends were diverging in Minneapolis and Saint Paul, with the former seeing more variability and an actual decrease in available NOAH rents for a time. Saint Paul’s rental market differs in quite a few ways, not least because we don’t build as much new housing, and it would be nice to see information about the actual place where the policy is being proposed.



Saint Paul Rent Trends

Well, I did what I could. A kind reader sent along rent data complied for the metro area from the Met Council. 

As far as I know, nobody has done this research on rents in Saint Paul. Certainly if there’s a comprehensive study on rental data produced by HENS, they haven’t shared it with anyone. (If you have one, send it my way!)

[Rent in Saint Paul goes up and down a lot, it turns out.]

Because the original Met Council data website shows quarterly trends, which fluctuate wildly, I put some key benchmark rental data into a spreadsheet to see how it looked longitudinally. 

Please note: The Costar datasource is the longest, and its 20-year dataset indeed matches the CURA report average, showing about 1.6% rent growth over time. The Zillow data is the only one that separates rents out by neighborhood.

(The Rental Revue dataset is not nearly as good, and just shows available rentals, as opposed to the entire market, that are available at that moment. You can pretty much disregard it for these purposes, but it’s still interesting to the nerds among you, especially since it shows trends counter to the others.)


[Red marks rates of change over 3% per year; figures are NOT adjusted for inflation; check out my math and the Saint Paul rental data here.]

I’m honestly not sure what to make of all this. I would be interested in anyone else looking at this data and letting me know their thoughts. Feel free to comment! 

But here are my initial takeaways:

#1: Long-term Rent Growth is Not That High

Over a twenty-year span, rent growth is pretty flat. It's a lower rate than Minneapolis, though it seems there's more variability. Compared to nearly every other growing metro in the country, we don’t yet have a huge problem with rents and housing becoming astronomically unaffordable. Keep in mind that the "1.6% over 20 years" number is not adjusted for inflation, and just about matches that figure! In real dollars, rents have been flat. Relatively speaking, that puts Saint Paul in an enviable situation. 

If you don’t believe me, talk to literally anyone who has lived in California or on the East Coast or in Denver or Austin or just about anywhere else with economic growth. It doesn’t take many of these conversations to make you feel pretty good about where we’re at, relatively speaking.

Also note: this good news is somewhat irrelevant because real wages have gone down for many BIPOC folks, though not all. This is one major cause of the housing crisis. Doing things like passing a living wage ordinance (or the Federal COVID relief and unemployment dollars) are very much helping to tackle this fundamental problem, but the problem remains.


#2: Saint Paul Rents are Rising Raster Recently, and in Certain Areas

The data also show that rental increases are getting worse, especially in working class and BIPOC neighborhoods. 

Zillow is the only dataset that disaggregates rents by geography here, but you can see that certain neighborhoods (highlighted in red) are rising faster than others. Given the housing shortage and increase in inequality, this tracks with what you’d expect: working class and BIPOC folks, who are most vulnerable to rising rents, are seeing the largest percentage increases.


#3: I Can’t Believe Nobody Has Studied This

Why am I the one doing this? So far, the only information on city rent trends I’ve seen is the 1.6% over 20 years number cited by the advocates of rent control.  Other than that, there’s a Minneapolis study and a lot of anecdotes. 

I would think that, before we introduce a sweeping city-wide ordinance that I believe comes with a lot of negative consequences, we should have a clear picture of the problem we are trying to solve. Someone should do a more detailed analysis of rental increases!

But apparently my half-assed BS is all we have to go by. 

So what does this mean? How do we react to the data? 

This is where you have to do some predictions, and try and think through how a complex policy would impact the also very complex housing market. Please note that I would really like to have people study this stuff besides me, because I suck at studying rental data!

That said...


Prediction #1: What Rents Would Be Relatively Lowered by Rent Control?

Well, lots of them. 

With this data, it’s hard to say how many apartments would be affected, but the number is in the thousands. There are overall 40,000+ apartments in Saint Paul, and the neighborhoods that are seeing over 3% rent growth these days is about half of them. You can guess that around 25% of the city's renters would see a benefit from a rent control policy, which would hold down rent increases to 3% in the specific neighborhoods where they are most needed.

Thus the rent control ordinance would cap rents for plenty of people in Saint Paul, making rents more predictable. It’s a pretty safe assumption that, especially in certain neighborhoods, rent control would limit rent growth fo thousands of people. It would make rental increases more predictable. Instead of large fluctuations, most Saint Paul renters could just about lock in a 3% increase every year. 

This is a good thing, relatively speaking, though it doesn’t solve the real problems driving the housing crisis. 

Basically, for the folks that would have seen the largest spikes, instead of a few years of large increases, you could count on a 3% rent increase every year pretty much indefinitely, at least as long as there was a housing shortage.

Certainly, a 3% increase is better than a 5% or 10% increase in rent. I mean, this is the goal of the policy. It will help thousands of people have more more stability in their housing costs, and the majority of these folks will be BIPOC or working class renters. 

But also note that this policy does not step rents from rising. As long as inflation remains low, they would continue to rise faster than the 20-year median. So that's not great either!

Anyway, if this was all the rent control proposal did, I’d be for it. But it's not...


Prediction #2: What Rents Would be Relatively Increased by Rent Control?

Well, also lots of them. The bad news is that, because the details of the HENS ordinance limit growth in the city’s housing supply, it will also drive rents up for many people in the city. If you stop building new apartments, rental housing becomes more expensive.

How much? I don't know.

There’s a lot of good research on the connection between building new apartments and reducing growth in rents. If you don’t believe, me, please read this well-researched lit review on how supply affects rents, or this paper on how the “skeptics” that increases in housing lower rents are probably wrong. Building more housing helps keeps rents lower than they would otherwise be, and if you stop a lot of new housing from being constructed, you’re going to drive rents up in the city.

(For just a sample, here's a well-known study: "the data span 11 cities and tens of thousands of units. The authors find that rents for existing rental units within 250 meters of the new development fall by 5% to 7% compared to rents in buildings farther away, between 250 and 600 meters.")

By preventing thousands of apartments from being built in Saint Paul, the rent control ordinance places added demand on existing housing. Some percentage of the people that would otherwise be living in newly constructed apartments will look for rental housing elsewhere in the city. These folks will be generally well-off and have good credit stores, and will drive up prices for many apartments that would not otherwise be affected by the rent control ordinance. 

The reduced supply will raise rents overall, especially for at the middle part of the market, especially in neighborhoods that would have seen housing construction: St. Anthony Park, Merriam Park, Hamline-Midway, Summit-University, Highland, West 7th, Downtown, the West Side, and (yes) even Frogtown.

Certainly we’re talking about slightly different groups of people with two trends, but eventually, it’s all the same set of apartments affected by the policy. A friend of mine calls this “downward displacement,” where people with more money and credit “take” apartments that would otherwise be in newly constructed buildings, leading to a chain of displacement that, eventually after a few steps, affects even the most affordable parts of the housing market.

Like it or not, rents go up when you stop building new housing. Overall, the effect of the rent control policy will be a mixed bag, and that’s a shame.


Rents v. The Big Picture

If all you’re looking at is rents, this policy is a net-positive. Many renters will be better off, a least for a while. While all rents across the city will keep going up, because you’re limiting the increase for a big chunk of the most vulnerable folks, the rest is noise. You're creating stability. Meanwhile, other renters will see larger increases than they otherwise might, locking annual 3% rent bumps for a large swath of Saint Paul renters.

But rents are one thing; housing is another. Even in the short-term, the big picture is where this particular rent control policy goes off the rails. This proposal does nothing to solve the real problems that are causing the housing crisis in the first place: income inequality and the housing shortage. 

Income inequality is too broad to dive into here, but I addressed the housing shortage problem in an earlier post. Rent control does not increase the housing supply, and most likely shrinks it over the long term. There are also the problems of disinvestment, shortages, and discrimination that historically have made cities with rent control difficult places to find a decent home.

[This house is a decent "comp" for the one we bought two years ago, only it costs over $50,000 more.]

Meanwhile, owner-occupied home prices that are already spiking will to continue to climb steeply under a rent control policy that restricts new housing construction. A good percentage of the people that would have moved into new apartments will end up buying homes instead, and you should expect to see the kinds of 10%+ annual increases in Saint Paul home values that have been common over the last two years These increases will be largest in historical working-class and BIPOC communities, putting homeownership farther out of reach for these folks.

There are all kinds of problems that will accompany this trend, since so much of US policy and ideology is centered on homeownership as the primary way that people the country acquire wealth. Saint Paul already has a huge black-white homeownership gap, as well another racial and ethic groups. Putting homes out of reach of working class and BIPOC folks will further inequality.

There are some other issues too, but for now I’ll leave it there. If you’re only focused on rents, this policy is probably a net positive. If you think about the big picture around housing issues, it’s a real mixed-bag. 

[See also my short column in Minnpost about the Saint Paul ordinance and my long-read with all the research about how this rent control proposal affects housing in Saint Paul, an explainer of why a 3% rent cap blocks new housing construction, a short posts on how the policy would affect taxes, and interviews with housing experts on the affects on new construction.]


Update: A dutiful reader put together a better-looking chart of the data, which you can see here.