U of M study reveals how Minneapolis landlords would respond to rent control
The Center for Urban and Regional Affairs (CURA) conducted a study published in February this year estimating how Rent Stabilization (RS) –– a form of rent control that allows landlords to raise rents at capped rates –– would affect Minneapolis.
The study included an interview survey with industry insiders –– landlords, developers (market rate), non-profit developers, lenders, industry experts and investors –– on how they would respond to rent stabilization in Minneapolis.
The respondents in the survey revealed that, among other things, they would:
- Raise rents in advance of the passage of rent stabilization:
One owner said, “All tenants would get letters. We would raise rents to market levels. All of the gains from the next ten years, I would need to collect them all now. Everyone else would do it, too.”
2. Pass on costs to consumers through higher non-rent fees and other charges
Some owners indicated that they would be incentivized to seek ways to increase non-rent income from fees and charges for parking, storage lockers, laundry, lost keys, late fees, etc.
3. Reduce expenditure on maintenance
One nonprofit housing leader said, “If you do something to limit my rents, then all costs downstream will be affected. And If you think developers and owners would proceed with a lower return on investment, you would be wrong. They would proceed with the same ROI, and lower operating costs to make the pro forma work.”
4. Reduce capital investments
“This is the real pressure point – you will hold off, delay another year, and instead of replacing the roof you will patch the roof.” Another owner said, “Old NOAH needs ongoing capital reinvestment but if there is no return, why invest in the building?” And one industry expert said, “There will be no carpet replacement. The quality of housing will go down because there is no incentive to maintain it and the tenants are going to
have to live with what they get.”
5. Reduce the construction of new housing
Many informants commented that RS would at least temporarily constrict the housing production pipeline, required to keep pace or to catch up with demand. This constraint on supply would increase scarcity, and cause rents and values to rise at steeper rates over the long run. Many of the developers we spoke to commented that they have either stopped activity in Minneapolis or are in the process of doing so because of the passage of the inclusionary zoning ordinance in 2020 and other new regulations. Developers and other informants suggested that apartment production might slow down, at least temporarily, as developers take a “wait and see” approach, while several informants commented that while some developers may exit the market, others will come in and find new ways to develop in Minneapolis.
Some advocates argue that rent stabilization may not affect new construction if new construction is exempted. However, experiences from other cities, like San Francisco, reveal that exemptions encourage landlords to convert their old buildings into luxury condos or redevelop in order to escape rent control measures. This effectively reduces the housing supply available for low-income renters, consequently raising prices even more. Thus, exemptions or not, the effects of rent control on housing supply are inescapable, albeit to varying degrees.
6. Convert to luxury apartments
Several informants thought a small number of apartments would be converted to condominiums to avoid rent regulations, and that some older buildings might be replaced with new construction at higher density so as to avoid a rent cap through a possible new construction exemption.
7. Exit the Minneapolis market –– especially in light of new recent regulations.
A number of informants commented that rent stabilization may cause both larger owners and small mom-and-pop companies to consider divesting of their properties. Several informants commented that they knew of portfolios that were quietly being offered for sale off-market.
Several other owners with properties in Minneapolis and elsewhere in the Twin Cities said they were exiting or considering exiting the Minneapolis market and reinvesting in other surrounding cities. In all cases, informants commented that it was not just rent stabilization but all of the recent new regulations that were creating uncertainty in the
marketplace.
Rent control or rent stabilization? There is very little difference
While the study downplays the effects of rent stabilization by trying to differentiate it from the more strict model of first-generation rent control –– whereby rent is frozen at a specific amount and no increases are allowed –– evidence reveals that even moderate measures of rent control have negative significant impacts on cities.
A study from Stanford University, for example, which analyzed the San Francisco market, revealed that the city’s rent stabilization measure –– which capped rent increases at seven percent –– reduced housing supply, incentivized landlords to convert to condos, led to residents overstaying, and raised rental prices citywide by 5.1 percent.
Similarly, a study from the MIT Center for Real Estate found that rent-controlled apartments in Cambridge, Massachusetts –– which were also allowed to raise rents but at capped rates –– were “older, in worse condition, and more in need of very essential repairs.”
Moreover, “chronic maintenance problems — such as holes in walls or floors, chipped or peeling paint, and loose railings — were more prevalent in controlled than in noncontrolled units during the rent control era,” a difference that fell when rent control was eliminated. Rent stabilization also reduced property values and reduced housing supply.
Minneapolis landlords, developers, and investors have good reason to worry about the possible impact of rent stabilization if enacted.