Minneapolis cap on short-term rentals upsets operators, developers

Anthony Aguirre left his corporate job to manage his eight Minneapolis vacation rentals full time. Now, as the city prepares to implement a new short-term rental (STR) ordinance that will limit investors to one STR other than the home they live in, he's being forced to make a decision: Sell, or convert them to long-term rentals.

"We've been running the business as the city wanted us to," he said. "But this could destroy my business."

The new rules, which were approved quickly and unanimously by the City Council late last year, do not include a grandfather clause — a provision that would apply to Aguirre and other current operators. And critics of the ordinance, which will govern Airbnbs, VRBOs and other vacation rentals, said the rules could stifle tourism and housing development in the city by eliminating a relatively new source of rental income for developers.

In addition to the stringent licensing and reporting regulations, the new rule says STRs may comprise no more than 10% of units in buildings with more than 20 apartments. That cap is raising the ire of larger property owners and developers who have relied on STRs to fill empty apartments and finance new projects at a time of unusually high vacancy rates in the city.

Minneapolis Council Member Steve Fletcher said that as the STR industry has expanded, so have complaints about STRs and concerns about the industry's effect on housing affordability in the city.

"We had been steadily receiving complaints about mismanaged properties," said Fletcher. "And because of concerns about the housing market being distorted by this new practice we decided to take action."

As STRs become more prevalent, cities from Bayport to Brainerd are implementing new regulations and some cities are banning STRs altogether. While the practice started as a way for people to share a couch or an extra bedroom with a budget-conscious traveler, the industry is now dominated by large companies including Airbnb and VRBO, which have built international marketing platforms that enable individual "hosts" to advertise and manage their listings.

Big Tech companies are getting into the business, as well, by committing to long-term leases for large blocks of rentals — often entire floors — in big apartment buildings. That sector is now dominated by San Francisco-based Sonder, which has listings in nearly three dozen cities worldwide. In Minneapolis, the website now includes 123 apartments with "discounted rates" from $66 to $136 per night.

It was Sonder's commitment a couple of years ago to rent 94 units in a new, 122-unit apartment building in the Mill District in Minneapolis that helped ignite the city's efforts to revamp a less-stringent STR ordinance that had been quickly implemented before a dramatic expansion of STRs before the Super Bowl. Sonder scaled back its commitment to one full floor of the building, appeasing some neighbors who were concerned about the high concentration of transient visitors.

As this practice increases, Fletcher said STR investors are competing with traditional renters and homeowners in a market where there's a limited supply, putting even more upward pressure on housing costs. "It has a significant market impact," he said.

Alisa Mulhair, general manager of Sonder Minneapolis, said the new rules will have a chilling effect on the city's ability to accommodate the increasing number of visitors who have needs that a traditional hotel can't accommodate.

"It's important for cities to acknowledge that flexible accommodation and the need for furnished housing can vary in duration anywhere from several days to several months," said Mulhair.

In a letter to the City Council, she said the rules could have unintended consequences for future housing development in the city.

She said they could stifle an important source of renters that housing developers are relying on at a time when many Minneapolis developers are having trouble finding renters.

In the letter, she said Sonder operates 220 units in nine Minneapolis buildings in areas where zoning rules already allow for such uses, and that it is in the midst of "active negotiations for multiple opportunities that would accelerate development AND provide incremental housing downtown."

She noted that the company doesn't allow one-night stays, maintains a strict no-party policy and that visitors in Minneapolis stay on average 15 days with more than 60% of its bookings for more than 30 days.

At North Loop Green, a sprawling mixed-use development that's slated to replace several surface parking lots in the North Loop neighborhood, the developer had already received municipal approval to include nearly 360 traditional rentals and nearly 100 STRs that would have separate lobbies and amenities for those guests.

In a letter to the City Council, Hines project development director, Bob Pfefferle, said that by increasing the number of rentals the company was able to add public amenities including green space, that otherwise would be unaffordable.

He also wrote that the new rules would affect the overall viability of the project, imploring the city to include a grandfather clause that would cover that project and others.

Sharon Cohn, the developer of a nearby North Loop building, which opened last spring in the midst of civil unrest and the COVID-19 pandemic and who also has a partnership with Sonder, wrote that without Sonder's commitment "the project would be nearly vacant."

Kari Lundin, a Twin Cities real estate agent who specializes in working with small real estate investors, said the ordinance comes at particularly perilous time for many small investors who are already struggling to deal with rising vacancy rates and new tenant protections.

"People want out [of the city]," she said. "I have a number [who] don't want to do business anymore in Minneapolis."

She owns a duplex near the VA hospital that's popular with patients and families and said the city's action came quickly and without ample notice.

"I have bookings next summer," she said. "So what do I tell them?

Barb Johnson, an Airbnb "super host," said that while she supports regulations that will improve the safety of such rentals and limit conflicts with neighbors, the rules are clearly aimed at the bigger operators, but will disproportionately affect smaller ones at a time when many are struggling.

"The pandemic and other situations during the past year have driven out a lot of the smaller players because we don't have the capital to withstand the past year," she said.

Aguirre, who runs a small STR consulting company, said he bought his first rental in 2012 — a triplex that he lived in and initially ran as a long-term rental.

During the Super Bowl he moved in with his parents and traveled so he could rent out his place as an STR, but eventually converted the other two units into STRs, which bring in about 20 to 30% more income than long-term rentals, he said. After leaving his full-time job nearly three years ago, he's not sure what's next.

"We hoped to have a long-term business in Minneapolis," he said. "Now we're just trying to stay afloat."

Jim Buchta • 612-673-7376