A 2019 Maxfield Research, Inc. study commissioned by the City of Duluth projected that the city could absorb up to 3,509 additional units of affordable housing from 2019 to 2024, not including the demand for 126 new single-family homes. In real estate, absorption is the percentage of homes sold compared to the number of homes listed for sale over a certain period of time in a specific area. In other words, Maxfield estimates that more than 3,500 new units of affordable housing could be built and sold in Duluth in the next five years.
Considering that the demand for new housing in the city is high and the availability of housing appears to be a concern, BBER Director Monica Haynes invited Jason Hale, senior housing developer with the City of Duluth, to sit down and discuss the city’s strategies for addressing the housing shortage. The following is an edited version of the conversation:
Monica Haynes: First and foremost, is there actually a housing shortage in Duluth? Clearly the narrative that you hear around the city is that there is a lack of housing. But is it possible to confirm that this is truly the case? If so, how does that shortage play out in terms of our ability to accommodate our current population and attract new residents?
Jason Hale: That’s a great question and one that more people should be asking. Yes, there is a shortage, but it’s very difficult to quantify how large it is. Many developers rely heavily on market analysis. But that is limiting, as it represents a static picture of the situation. For example, in the city’s 2020 Housing Indicator Report (which includes a survey of households and is, therefore, subject to a certain margin of error), the rental vacancy rate was estimated to be 5.2% (quite a bit higher than we expected). But in 2021, the vacancy rate dropped to 2.1%—more in line with recent years’ values and what we were expecting to see.
However, there are other pieces of evidence that help support the notion that there is, in fact, a shortage locally. One is the absorption rate of new housing units. For example, when Mark Lambert, developer of the Bluestone housing units, wrapped up construction of the final unit—Vue (pictured), which has 193 units–the luxury property was full before it even opened. And six months later, it is still full. If a property like Bluestone (which charges higher rates) is full, then lower-priced units would presumably also be full, right?
Local realtors are also saying that the churn, or the rate at which homes are being sold, is happening quickly with new housing sales. Many single-family homes are receiving offers on the same day they are listed.
Finally, I’ve recently had conversations with two large local employers that, combined, have lost more than 30 new hires because of those potential employees’ inability to find suitable housing. These were highly skilled individuals who had accepted offers, but they later were forced to decline, citing housing as their primary reason.
Haynes: According to the U.S. Census Building Permits Survey, it appears that Duluth has added significantly more multi-family units than single-family units since 2016. And according to the 2019 Maxfield Research study, that trend is predicted to continue through 2024. Is that strategic, or is it due more to challenges related to new single-family home construction?
Hale: All new housing must go through the city in some capacity (approving permits, working with developers, etc.). So for projects that are receiving financial assistance or that require more than the normal entitlement process (e.g. projects located in tax increment financing (TIF) districts, it takes roughly the same amount of administrative work to build a multi-family unit as it does to build a single-family unit. From that standpoint, the city can affect much more change with larger units.
It's also easier to build affordable units in a multi-family structure than it is to build affordable single-family houses. Due to the cost of construction, it’s nearly impossible to build a new, single-family home for less than $250,000, which is beyond affordability for a median household’s income in Duluth. For that reason, the Housing and Redevelopment Authority typically loses money when it constructs and sells single-family homes. In the end, it’s all basically a math problem.
Availability of land is another big challenge. In Duluth, most of the sites that are available for development are commercial infill sites—vacant lots that exist between other developments in the area. The cost of purchasing these sites is typically very high, making it impossible to build enough single-family units to justify the purchase price.
But the city is working on this, and that’s partially what the new Housing Trust Fund is for. The fund, established this year and currently containing $6 million, includes three programs: a comprehensive rehab and conversion program, an infill development program, and the flexible multifamily fund. The fund is meant to support small-scale projects that don’t typically receive funding resources. Because the city created the fund, it is more flexible than other funding resources, which is also a benefit. The HTF can be used for all types of properties, and in all parts of the city, which is not the case for most funding sources.
Haynes: Which of the city’s programs do you see as being the most impactful in terms of addressing the housing shortage? Why? Are there specific efforts that you are excited about or want to talk more about?
Hale: The program that will likely have the biggest impact on housing is definitely the American Rescue Plan Act (ARPA). I don’t expect to see an investment like it again in our generation. The Duluth city council approved $19.2 million for housing from ARPA, and the city put out a call for proposals in November, with the aim of helping to fund up to four projects in the next couple of years. By my estimates, we should have more than 400 housing units planned directly as a result of that funding. Developers are also very sensitive to the fact that the Federal Reserve will likely raise interest rates in the near future, which will make it more expensive to buy and build. They want to get a product going now. 2022 is going to be a very busy year. And I predict that, by the end of 2023, the city could add or have agreements for 1,000 new units.
As for specific development opportunities, there are three that I am most excited about. The first is Lot D (12 waterfront acres along Railroad Street near Pier B Hotel), the second is the Central High School property on the hill, and the third is the Lester Park Golf Course (37 acres). These three sites are all larger sites that could bring development opportunities beyond just housing—we have a chance to build neighborhoods. Lot D, for example, could accommodate 400 units of housing plus retail and community amenities. Having more density downtown could also lead to amenities like grocery stores. These are exciting times to be advocating for new housing locally!
Photo from Bluestone Vue website