28 January 2024
As president of the Greater St. Paul Building Owners and Managers Association, Tina Grossman keeps a close eye on the fate of large office buildings in downtown St. Paul, including conversions to residential apartment buildings.
Once a bright spot for a downtown that struggles to attract sizable office tenants, office-to-residential conversions have become hard to find. Grossman couldn’t think of any beyond the upcoming conversion of Landmark Towers. Some longstanding projects appear stalled, and none were completed downtown last year.
“Things are not good now,” Grossman said, “and they’re looking to get worse.”
The rental housing market has quieted in other ways, too, with depressed sale prices on apartment buildings and less activity on new construction.
Buyers of St. Paul apartment buildings last year paid around $78,000 per unit, down 45% from the year before, according to HousingLink, a nonprofit housing information clearinghouse based in the Twin Cities. While some blame St. Paul’s voter-approved rent-control ordinance, Minneapolis — which has no such policy — saw its own apartment sale prices drop by 27%.
Housing industry officials caution that there are different ways to crunch and interpret the numbers. The HousingLink averages are based on sales reported by Finance and Commerce magazine, and may not be exhaustive. Still, “the number in Minneapolis sounds about right,” said Cecil Smith, president and chief executive of the Minnesota Multi Housing Association, which advocates for property owners and managers of apartment buildings.
Elated by the price drop, Weidner Apartment Homes of Washington state recently went on a buying spree, picking up fancy Minneapolis properties like the Elan Uptown apartments, the Nic on Fifth and the LPM Apartments in Loring Park at steep discounts, Smith said.
The picture in St. Paul is a bit cloudier, and that 45% figure may not mean that much given the small number of transactions. “I would be concerned about the sample size,” Smith said. “I’m just not aware of large institutional transactions in St. Paul.”
St. Paul Planning and Economic Development publishes a housing dashboard that measures permits for new housing construction, including alterations and additions such as mother-in-law apartments and single units added to public housing. The dashboard shows a steep drop in planned housing construction, from 1,638 new permits in 2021 to 1,400 permits in 2022 and just 1,130 last year.
The U.S. Department of Housing and Urban Development tallies construction differently, focusing not on new permits but on the last permit needed to make a structure livable. By that count, permitted construction of multifamily buildings in St. Paul actually rose 7% from 1,072 housing units in 2022 to 1,152 units last year.
Either way, construction cranes are laying low in most of the city’s wards compared with just a few years ago. Both 2020 and 2021 saw developers pulling permits for more than 2,000 housing units in multi-family structures.
Why the slowdown?
If St. Paul is a less attractive place to build, buy or convert an apartment building than just two years prior, is it because of slow-growth population forecasts, rent control, high interest rates, rising construction costs, economic jitters or something else, like worries about crime?
How about all of the above?
The rent-control ordinance may have angered developers, but the city council gave new construction a 20-year exemption in late 2022, and affordable housing was exempted altogether. The city council tightened rules requiring landlord documentation for certain types of exemptions, making them a bit harder to come by, but at the same time introduced “vacancy decontrol,” allowing for larger rent hikes on newly vacant units.
Nationally, professionals seeking lower living costs, milder climates and other perks are fueling a migration from northern states and coastal areas to Sun Belt cities like Nashville and Dallas. High interest rates have made it hard to build apartments without public subsidy or sell a complex without price drops.
In St. Paul, violent crime appears to be dropping, however gradually, and surveys show it no longer ranks as a top concern.
Still, industry experts predict major slowdowns in Twin Cities rental housing.
“Right now, there are hardly any multifamily deals that really pencil out with 7% interest rates,” Smith said. “Nationally, we’re looking at a 25% drop-off in production, and locally a 45% reduction. … We’re seeing anemic population growth (in the Twin Cities). We have a much tougher regulatory environment, whether it’s rent control, inclusionary zoning or labor standards. All of these things are contributing to the cost of housing.”
Developer John Wall, who owns several apartment buildings in St. Paul, said he’s monitoring the residential housing market.
“I don’t have any plans to build or even buy in St. Paul, in light of rent control,” he said. “It’s kind of hard to make the numbers work for new construction, and interest rates have made it harder to buy, or basically to sell, because they have to offer a reduced price.”
The city’s 20-year exemption from rent control for new construction helps, “especially those people who don’t have the expectation of holding it for a long time, but it’s still a headwind for all development,” Wall said. “One day, those 20 years is going to be up.”
HousingLink took a look at permits pulled for new multifamily buildings with at least five units. Minneapolis, which did not institute rent control, saw that number drop from nearly 5,000 total units in 2022 to around 1,400 last year.
St. Paul, by contrast, saw an increase in permitting, according to HousingLink, which relies on HUD data. Nearly a third of its new permits were for affordable housing, according to the city planning dashboard.
Smith noted that CoStar, which tracks actual apartment “deliveries,” or openings, rather than permits in the pipeline, found the numbers to be much starker. Minneapolis opened 2,539 new housing units last year to St. Paul’s 463. Meanwhile, Minnetonka, a city of fewer than 55,000 people, delivered over 1,000 new housing units.
Housing projects underway or recently completed in St. Paul include new affordable housing within Highland Bridge, the Heights project at the former Hillcrest country club and the Alatus development on Lexington Parkway.
Bigger apartments, bigger increases
St. Paul and its suburbs lost some population during the first two years of the pandemic, leading to some stabilization in rents and housing prices, although rents for larger apartments kept rising.
“Rents, especially for one- and two-bedroom units, were remarkably stable in Minneapolis and St. Paul through the years of the pandemic and a bit beyond and have just started to tick up in the past couple of quarters,” said Dan Hylton, a research manager for HousingLink.
The median rent for one-bedroom apartments in St. Paul was 1% higher in November 2023 than the year before, an increase well below inflation and the limits set by the city’s rent-control policy. Rents for two-bedroom apartments didn’t change at all, according to HousingLink.
St. Paul’s three-bedroom apartments were a different story, however. HousingLink reported family-size apartments had rents come up 7%, roughly on track with inflation, and more than double St. Paul’s 3% rent-control limit. (The increase was 11% in Minneapolis.)
“I suspect … that the aggressive permitting and building of multifamily over the past decade was more focused on the smaller-bedroom formats and that there really could be a supply/demand issue pushing three-bedrooms a little more,” Hylton said.
Given rent-control limits, how could rents increase so much in a single year? Many landlords have had an easy time self-certifying rent increases above 3% by pointing to property tax increases and other expenses. The city council also exempted new construction and affordable housing from the policy entirely in September 2022, releasing about one-third of the city from the rent cap.
Additionally, the council instituted “vacancy decontrol,” so when a tenant moves out of a rent-controlled apartment in St. Paul, a landlord can hike rent by 8% plus inflation, for a total increase of 15.45% throughout last year. (On Jan. 11, that limit dropped to 10.71%.) The city approved 781 rent hikes last year through vacancy decontrol.
In other cases, property owners moved out of owner-occupied units and put them on the market as new rentals, boosting average prices.
“There’s a known shortage of larger units citywide, so there’s a definite market there,” said Angie Wiese, director of St. Paul’s Department of Safety and Inspections. “If you’re putting your unit on the market for the very first time, you control what that three-bedroom apartment is going for.”
On occupied units, landlords applying for rent increases above 3% were approved by city staff almost half the time last year — 75 of 154 requests — according to DSI. That was a sharp drop from 2022.
“In the previous year, there was no requirement to provide a rent roll, and no requirement for us to notify the tenants before approval, and now there is,” Wiese said. Most rent hike refusals were the result of landlords failing to submit follow-up documentation, she said.
Rent vs. buy
For years, the Twin Cities was a cheaper place to buy a home than to rent. That’s no longer the case, as rents on small units have stabilized, while limited inventory and high interest rates and home prices have put homebuying out of reach for many.
As of 2022, it’s generally cheaper to rent than to buy in St. Paul, according to constructioncoverage.com, which found the median monthly mortgage payment in the city is $2,007, while the median rent is $1,459. St. Paul is far from alone; the analysis of 338 cities found only 28 cities where it cost less to buy than to rent.
The Minneapolis Area Realtors and the St. Paul Area Association of Realtors crunched their own data and found that the median home in the metro last year sold for $362,000, up only 2% from the previous year. However, fast-rising interest rates drove a theoretical monthly payment on a new mortgage to roughly $2,650 in December, up from $1,600 in 2020, the Realtors said.
Although renting may now be cheaper, that doesn’t mean it’s easy to find an affordable apartment for a growing family in St. Paul.
HousingLink counted nonsubsidized, three-bedroom apartments in St. Paul that would be affordable to a family earning 60% of the 13-county area median income, or $74,500 for a family of four.
Within the category of three-bedrooms dubbed “naturally occurring affordable housing,” or NOAHs, HousingLink found 41 available St. Paul units in November at that income level, down from 47 available units a year prior. For families earning 30% of area median income, there were no such apartments for the second year in a row.
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