Cautious and optimistic real estate developer despite St. Paul’s rent control

As a second-generation real estate developer, Chris Sherman runs the business his father started in 1979, and he’s still optimistic in St. Paul, especially downtown, with one caveat.

“St. Paul is the only city we find ourselves in that has an active rent control policy,” said Sherman, who is listening as intently as anyone as the mayor’s 41-member task force St. Paul, Melvin Carter, examines potential changes to electoral politics. policy of “rent stabilization” which comes into force in May. Otherwise, “we are certainly optimistic about the long-term prospects for downtown.”

Sherman Associates manages some 8,500 homes that the Minneapolis-based company has largely developed itself, with another 2,500 homes under development from Milwaukee to Denver.

As of this month, the company – which has completed nine major residential and mixed-use projects in Lowertown alone – now oversees some 420 apartments overlooking the Mississippi River off Wabasha Street, towards the north entrance on the west side. from the city. Earlier this month, the company opened the Scenic, a 171-unit market-priced unit near the U.S. Bank campus, not far from the company’s West Side Flats property, which opened in 2014.

Last September, another 82 affordable housing units opened in the Verdant, which Sherman says uses geothermal technology and other sustainable energy to maintain a low carbon footprint, which lowers utility costs for tenants.

In recent years, the company has sold Rayette Lofts, Sibley Court and Sibley Park apartments.

But if the state extends the tax credit program it launched in 2010 for historic rehabilitations, Sherman plans to acquire the downtown Landmark Towers on St. unoccupied floors which he plans to convert into larger than average alcoves. and two-bedroom apartments. And he’s aiming for the expensive side of the rental market.

“We’re looking at average rents that are just over $2,000 a month,” he said.

The following interview has been edited for length and clarity.

Feeling confident about an $80-85 million luxury housing conversion in downtown St. Paul?

Chris Sherman in front of the new Verdant Apartments. (John Autey/Pioneer Press)

Housing is the highest and best use of Landmark Towers. You already have the condos on the upper levels. The amenities around us with Hotel St. Paul, the park, the river, we believe there will be strong demand for all 186 units when we open in 2024. We have set our rent levels at rents above the market.

What type of tenant do you hope to attract downtown?

Certainly, we will target the owner of St. Paul who is looking to downsize, who loves St. Paul and has loved St. Paul for decades. They want to be near the river, parks. They will also be people who already live downtown. The downtown population has grown significantly over the past 20 years. We believe it will continue to grow over the next decade. Converting existing buildings like the Landmark Towers into housing will be very important in attracting more people to the city centre.

In November, St. Paul voters approved a 3% annual cap on residential rents, which will go into effect in just over a month. For some property developers looking to attract investors, this is a concern, especially given the rising prices of home construction. What are your thoughts?

The escalation in construction costs has been very significant over the past 12 months. We’re hoping construction costs will start to slow down, but it’s been a big headwind for new production. With inflation, growth in rents will occur. Utilities expenses and property taxes have increased significantly over the past two years. On top of that, we’ve seen substantial salary growth, which is a positive thing, but it’s impacting underwriting. The Twin Cities continue to be a strong market in which to invest.

Some developers said they chose not to build in St. Paul at this time, while others say the decision is not theirs. They simply lost their funding.

Equity follows returns. Regulation and the fear of future regulation impact the returns that equity can often generate. St. Paul, with a 3% rent cap, really doesn’t allow equity to meet its return threshold. That’s what we’re seeing from a dozen developers active right now as they slow down or halt their plans for new production in St. Paul. Equity looks across the country. In the Twin Cities, the suburbs have largely been an attractive place, for a lot of good reasons – our park systems, our employers. But there are plenty of options across the country, and right here in the Twin Cities. Regulation sometimes, and in this case certainly, has a negative impact. Values ​​are down due to current policy, which we hope can be improved over the next 12 months.

How would you improve rent control?

More production, more supply, allows greater long-term affordability and a greater tax base. We advocate for new construction to be excluded from rent control policy. But equally important, we advocate that existing multi-family dwellings have a modified rent control policy that allows for minimal or no impact on actual value or appraised value. There are very few rent control policies in the country that limit rent increases when there is a change in occupancy. A resident moving into a new home must pay the market rate.

Other changes?

A 3% rent cap on a renewal is too low, especially during a time when inflation is 7-8% per year. I think there’s a very detailed conversation that needs to take place about what it is. In Portland, Oregon, it’s 7% plus the CPI, the rate of inflation, as determined by the consumer price index. I believe that the IPC must be integrated.

One critic would say that landlords raising rents more than necessary are part of the problem. They have benefited from passive income and should focus on tenant-based solutions.

There is a lot of dialogue about multifamily housing in both St. Paul and Minneapolis. We are very focused on working with the city to improve production, preserving more affordable housing. We are working with the cities of Minneapolis and St. Paul on how we can best approach this by providing more housing options.

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