Aeon’s Laura Russ offers insightful takeaways from this unique market on what operators face today.
The strict rent control policy enacted in St. Paul, coupled with the eviction moratorium and the overall economic volatility that followed the post-pandemic boom, have all made it harder for Twin Cities multifamily operators to manage their properties, particularly for those active in the affordable housing arena.
“There are several strange phenomena happening in the market right now,” Aeon Chief Real Estate Officer Laura Russ, told Multi-Housing News.
On one hand, she sees high vacancies across affordable Twin Cities units, but on the other hand, she admits that demand for quality affordable housing communities that are well-managed and efficiently operated is sky high. Currently, the nonprofit developer owns and manages roughly 6,000 affordable apartments in the Minneapolis-St. Paul area. Russ’ main focus is to stabilize the company’s portfolio and improve its operations. Here’s why.
You recently joined Aeon’s leadership team. What are your priorities in your new role?
Russ: My first priority is to rebalance and stabilize our portfolio. Aeon acquired a large number of naturally occurring affordable housing properties right before the pandemic hit. These properties required much higher capital investment needs than anticipated and the environment immediately after acquisition prevented implementation of the planned approach. These properties will need the whole property reinvestments comparable to a new construction effort.
My other priority is to improve our operating performance. Like many affordable providers, we have experienced high physical and economic vacancies over the last couple of years. The reasons for this are complex, but include the unintended consequences of the eviction moratorium and much higher social distress levels within our resident populations and geographic areas.
I know you’re also aiming to contribute to Aeon’s new strategic plan that will guide its work over the next decade. What are the main aspects that will be included in this plan?
Russ: Our strategic plan is about building a bridge as an organization to a more stable portfolio. Rather than prioritizing our efforts into new development or acquisitions, we’re looking at tools to recapitalize our existing portfolio with more direct sources of capital and also to refocus on our operations by modernizing and improving the effectiveness of our operations. This includes things like finding new ways to reward and incentivize our residents. We need to express our appreciation and thanks to our residents that have continued paying their rent and contributing to their community.
You have an extensive background in affordable housing operations. What do you think the Twin Cities lack the most when it comes to easing the affordable housing crisis?
Russ: I think, in general, there is an underappreciation of the management and operation of affordable housing. The fee structure incentivizes getting the deal done over the long-term success of the property as an ongoing community. Although new development is obviously important, poor operations result in poorly created policies that then contribute to making housing harder and more expensive to run. For example, security issues are a big topic at many of our properties right now. Essentially this adds a ‘tax’ onto our properties because of the increased spending required. Some local policies have made it harder for us to remove residents who have engaged in dangerous behavior which is sometimes required in order to protect the rest of our residents.
What are the most stringent problems that Twin Cities affordable housing developers deal with today?
Russ: Finding balance in the region so that affordable housing is not overly concentrated but provided in sufficient demand across the region to meet workforce needs, and also finding renters that can be successful in our housing, are the most difficult issues right now.
Given the current market conditions in Minnesota, what do you think is the best approach to meeting the high affordable housing demand in the Twin Cities?
Russ: There are several strange phenomena happening in the market right now. One is a high number of vacancies in affordable units. There are many reasons for this and some have to do with the mismatch between the barriers to housing and the market supply. For example, many residents in search of housing are looking in areas where there is less affordable housing. Other times residents are not ready for independent living. We plan to experiment with new programs through Housing Link to reach some of these residents. Providing much deeper support services for these residents and finding new ways to serve them by recognizing that income is not their primary barrier is important.
In general, creating the conditions for new housing supply is the most important and costless policy change policymakers can make. These include changes such as reducing zoning and regulatory barriers and not adding new operational constraints through poorly constructed policies
An amended version of St. Paul’s rent control policy went into effect at the beginning of this year. What does this mean exactly for St. Paul landlords? How does it impact your portfolio?
Russ: Again, these types of policies have a lot of unintended impacts. The main one is that it is taking a lot of time and money for lawyers and accountants to understand and interpret the rules that are not well understood often even by the cities themselves. This takes away from what we would rather be doing which is producing and running housing. Since rents have been trending downward and AMI income levels have been trending upwards in many of our areas, there are questions about how these rules will impact our properties that have rents running alongside AMI levels.
In general, I expect the overall supply of new housing and the quality of existing housing to decrease which is a loss for all St. Paul residents, especially those that may not live in St. Paul yet such as recent immigrants and younger people.
What projects is Aeon currently working on? How are you serving Twin Cities residents?
Russ: We’re currently working on a deeply supportive housing property in downtown St. Paul for formerly homeless. We’ve learned a lot about serving this population in recent years and our main takeway is that having the right partners and sufficient funding sources is crucial. In these properties, the main barrier for residents is not income but often mental health, addiction, and many lack the readiness to live independently. Just providing them with income supplements is setting them up for failure. Finding ways to be supportive and also hold them accountable so that they don’t compromise the experience of other residents is one of the challenges.
Demand for affordable housing units usually increases when economic threats arise. What are your expectations for this year? How is the current uncertainty impacting the Twin Cities affordable housing market?
Russ: I think the impacts will vary widely depending on the market area. Many neighborhoods and the downtown areas of Minneapolis and St. Paul are distressed right now, and I’m concerned about an overconcentration of low-income housing. It’s important that areas retain economic diversity and that lower-income residents have mobility and options to live in higher opportunity neighborhoods. This may leave some market-rate opportunities in economically challenged areas.
Is there anything else you would like to add about the future of affordable housing development and preservation in the Twin Cities area?
Russ: I would love to find more ways to fund housing as directly as possible. The more hands that touch every dollar we spend is less that goes directly to help residents. To that end, I hope our industry focuses more on effectiveness in terms of program administration, property operations and resident success.
