Multi-family apartment construction slows by more than 80 percent in St. Paul

For months, housing developers have claimed that construction activity around new rental housing in St. Paul has all but ground to a halt.

Rent control is still weeks away from taking effect in the capital city, but new building permit data appears to lend some credence to those fears, even as experts predict record-setting industry growth nationally.

From the outset of December 2020 to the beginning of March 2021, construction firms pulled building permits for 1,393 housing units in mixed-use or multi-family apartment buildings throughout St. Paul, about half of them located along University Avenue.

Fast-forward a year, and that pace has slowed to a relative crawl. From December of last year to the beginning of this past March, firms pulled permits for just 231 St. Paul housing units in mixed-use or multi-family buildings, a decline of more than 80 percent.

In other words, winter construction activity for St. Paul apartment buildings slowed to a sixth of the pace from a year ago.

PERMIT DATA

That’s according to permit data requested by the Pioneer Press following approval of the city’s ballot-driven “rent stabilization” ordinance last November.

That’s not good news for anyone counting on new housing production to soften high rents. Some are laying blame for that slowdown on the rent control ordinance. Before approval of the ordinance, which will limit annual residential rent increases to 3 percent and takes effect May 1, developers warned that it would have a chilling effect on financing housing projects.

Some firms have publicly announced they’ve chosen not to move forward with planned housing, at least for now. Others say they’re at the mercy of unforgiving investors.

“The single most effective solution to address housing challenges is to produce more housing across the income spectrum,” said the Minnesota Multi Housing Association, in a statement. “When Mayor (Melvin) Carter came out in support of rent control and voters adopted the ballot measure, we warned that production would crater.”

CITY OFFICIAL: VARIATION IN PERMIT NUMBERS NOT UNCOMMON

Still, officials caution that seeing significant variation from year to year in building activity is not uncommon. In 2017, for instance, there were 773 new units of housing built in St. Paul across all types of new residential construction, according to city data. Activity doubled in 2018 and 2019, when roughly 1,500 housing units were slated for construction in each year.

In 2020 and 2021, despite the vagaries of the pandemic, the pace of construction picked up again, and developers pulled permits for 2,489 and 2,320 housing units, respectively.

“Development/construction works over long horizons,” said Suzanne Donovan, a spokesperson for the St. Paul Department of Safety and Inspections, in an email. “It can easily take a year (or more) to move a large project from concept until the time a developer actually files a permit application. Community engagement, financing, etc. occur along the path. Submitting a permit application for a new multi-family project is typically not the result of recent decisions.”

An immediate market reaction — and winter activity — may not be particularly indicative of long-term trends, Donovan added.

“Full-year numbers are what’s considered meaningful — frankly, not just by the industry but also more valid statistically,” she said. “Fluctuations over short periods are typical and, historically, more permit applications are filed in late spring/summer.”

Assessors have also cautioned that it may be too early to tell the impact that rent control will have on both building permits and apartment values, given that housing demand in the Twin Cities remains high.

HIGH DEMAND FOR FAMILY HOUSING NATIONALLY

Still, St. Paul’s slowdown seems to fly in the face of industry tailwinds. In early December, the national real estate investment firm CBRE Group predicted that not even stock market volatility would be able to dampen investor confidence in constructing new multi-family buildings across the country, as a growing economy is boosting demand for family housing.

According to CBRE: “The multifamily sector is set for a record-breaking 2022. … Downtown multifamily properties are filling back up and occupancy rates are nearing pre-pandemic levels, spurred by a confluence of factors: fewer restrictions on urban amenities, higher vaccination rates, a growing willingness to use public transit, the reopening of college campuses and more workers returning to the office.”

Rent control doesn’t take effect in St. Paul until May 1, but some economists have already declared it problematic.

STUDY LOOKED AT ST. PAUL PROPERTY VALUES

Last month, researchers with the University of Southern California’s Marshall School of Business published a 58-page study of St. Paul’s housing market that claims rent control caused property values to fall by 6 or 7 percent, for an aggregate loss of $1.6 billion.

Their study — which some housing advocates have called premature — compared residential property sales in St. Paul to Kansas City, St. Louis, Indianapolis, Nashville and Denver.

The study authors noted that “St. Paul’s rent control ordinance is unique in its stringency,” in part because most other cities that have instituted rent control allow “vacancy decontrol,” or rent hikes above the rent control limit if a property becomes vacant and is rented out to new tenants.

They also noted the St. Paul policy does not adjust for inflation or exempt small landlords or new construction.

DRAFT RULES FOR ORDINANCE

On Friday, the city’s Department of Safety and Inspections issued 17 pages of draft guidance on the new ordinance, including how landlords might go about applying for hardship exemptions.

The draft rules, which will be finalized April 29, allow landlords to self-certify increases above the 3 percent rent cap but below 8 percent, provided they can provide the city with documentation of certain expenses, including inflationary costs.

Eager to jump-start housing production, the mayor’s office has already asked the city council to consider exempting new construction from rent control for 15 years.