Duluth is adding jobs, but running out of housing

There is a lot of optimism about the future of Duluth these days, given the city's burgeoning arts and outdoor scene, low unemployment and a growing number of new jobs.

In just the past two years, Duluth-based LHB, an engineering firm, has added nearly 100 employees.

Among them is Caralyn Stevens, a designer who grew up across the bridge in Superior, Wis. But when she returned home for her new job in 2012, she wanted to live in Duluth, where she would be close to work and a short drive from the woods.

"It has everything going for it and it has all the potential to just keep getting better and better, with more jobs, more young professionals," she said. "Our friends are coming to the area."

But Duluth came with one drawback: It was nearly impossible to find a decent place to rent.

"I don't need a castle," Stevens said. "But I found myself in about a 300 square foot studio apartment, on the third floor of an old building, paying between $550-600 for a 300 square foot apartment. It just felt like robbery."

Stories like that frustrate Duluth Mayor Don Ness, who aims to make the city not just a weekend tourist destination, but also an attractive place to settle.

That's why Duluth is investing in trails and parks while also focusing on downtown arts and culture venues. The strategy appears to be paying dividends.

Several growing companies, including women's clothing retailer Maurice's, and pipeline builder Enbridge, are bringing young professionals and families to town. But the city needs more affordable places to live, Ness said.

"If we're going to grow our community, grow our tax base, grow our population, we can't do that unless we're aggressive at investing in our housing stock," the mayor said, noting that many of the newcomers can afford moderately priced construction.

According to the most recent state data, Duluth added more than 1,000 jobs between the fall of 2012 and 2013. Jobs in the engineering and architectural services field have nearly doubled in the past decade.

"Folks are coming in and they're making $50,000 a year," Ness said. "Those are good jobs."

"What they're looking for is a nice, clean modern unit that they can spend somewhere between $600 and $1,200 a month," he said. "So it's not the very low income [but] it's not the very expensive places."

The need for more housing has increased as Duluth's unemployment rate has shrunk to pre-recession levels. A recent study concludes the city needs 1,000 new housing units in the next three years and an additional 1,300 by 2020. The city's rental vacancy rate is less than two percent, half of what housing experts consider a healthy rate.

Other towns far from the Twin Cities metro area face similar dilemmas, from Roseau and Thief River Falls to Worthington.

Digi-Key is busing workers to Thief River Falls. The rental vacancy rate in Roseau, where snowmobile manufacturer Polaris is thriving, is essentially zero.

So if the demand is there, why aren't developers rushing in?

"The economics of it just don't work, when rents have traditionally been low in communities like this," said Mary Tingerthal, is commissioner of the Minnesota Housing Finance Agency.

Tingerthal said developers worry people in Duluth and other Minnesota towns won't be willing to pay enough in rent to earn a sufficient return on their investment.

"While someone in the Twin Cities, a young professional, might not blink twice at the idea of paying $1,100, $1,200 a month rent for a one-bedroom apartment, the perception is that one of the advantages of living in Greater Minnesota is that rents are lower," she said.

Tingerthal said the state is encouraging developers to push up rents a bit, because new hires often can afford more than the prevailing market rates.

"It's a matter of priming the pump, getting developers to recognize that a community is back on the upswing, and that they should be looking forward in terms of where they're looking to price their product, rather than looking backwards to the bad old days in Duluth, where it was really tough to attract young folks."

The state is investing $10 million over two years into developing housing in communities with tight housing markets. State lawmakers have introduced bills this session to allow developers to employ tax increment financing, a method of capturing the property taxes generated from a new development and then using that revenue to help finance the project. Currently, Minnesota allows such financing only for subsidized housing projects.

Until the housing picture improves, the city will miss opportunities to attract some potential residents. One who got away is Linda Kerr, an administrative assistant from the Iron Range town of Virginia, who quickly grew frustrated with a market that offered little for someone looking for mid-priced housing.

Before finding a place in Superior, Kerr commuted 125 miles round trip to work, rather than pay $1,200 a month for a small rental house.

"It almost seemed like it was worth it to make the commute and pay the extra money in gas, rather than spend that kind of money on a place to live," she said.

But in seeking to broaden its housing options, Duluth faces some unique challenges, said Chris Eng, executive director of the Duluth Economic Development Authority.

"We're a fully built out city, and most of the sites we're looking at are redevelopment sites," Eng said. "And redevelopment is always more expensive than a green field."

Also, while Duluth is creating jobs, since 2000 the population has remained flat at about 86,000 residents. In part, that explains why there aren't any production builders in Duluth, outfits that can finance and construct an entire subdivision at once, said Chelle Eliason, executive officer of the Arrowhead Builders Association. She said builders in Duluth typically are only willing to risk building three or five homes.

"That is an issue, because you're talking about building on an economy of scale," Eliason said. "So you're bringing the prices of the houses down if you have a larger number of houses that you're constructing."

The city is exploring ways to reduce the cost of construction. Officials are also working with employers to match a $500,000 challenge grant from the Greater Minnesota Housing Fund to build new workforce housing.

That would be welcome news for aircraft maintenance company AAR, which has hired 300 people since opening in Duluth about a year ago.

Mark Ketterer, the company's vice president of operations, said many of those employees are forced to stay in hotels for several weeks when they're first hired. The company plans to open a fourth maintenance line in September.

"We'll be adding another 60 to 70 people between now and then," Ketterer said. "So I don't see it getting any easier in that short of a time period."

Duluth officials say a number of developers hope to turn dirt on new housing projects when the snow melts. They're needed quickly. The city has about 1,000 job openings.