A recently released report explores some of Duluth, Minn.'s housing challenges, including the high cost of building a single-family home in the city.

While Duluth has made progress adding to its inventory of rental housing in recent years, the pace of construction for single-family homes has fallen woefully short of goals set forth in a market analysis conducted by Maxfield Research & Consulting. To accommodate the city's anticipated growth, the firm predicted in 2014 that Duluth would need an additional 4,470 units of housing by 2020.

Single-family homes were to account for about 20 percent of the mix, requiring the construction of 150 residences per year. But Duluth reported just 31 housing starts in 2014 and 45 in 2015, according to a report recently completed by the Northspan Group Inc. Even with neighboring Hermantown thrown into the mix, no more than 60 to 70 homes per year are being added to the market, said Karl Schuettler, Northspan's director of marketing, research and analysis.

With most Northland homebuilders already booked well into the future, Chelle Eliason, chief executive officer for the Arrowhead Builders Association, said it's difficult to imagine increasing new construction to the prescribed 150 houses per year any time soon.

Duluth, Minn.
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She said industry capacity constraints are "a universal challenge within the local area, the region, the state and nationally." That's largely a reflection of a labor shortage, Eliason said.

"Workforce development, especially in the construction trades, is a huge challenge for everyone," she noted

New homes are not only in short supply in Duluth — they're also relatively expensive, when compared to other cities in greater Minnesota. A review of home sales in Duluth since 2009 revealed the average price of a newly constructed home topped $301,000 — the highest of any other comparable city in the study.

Duluth stands in particular contrast to Moorhead, where the average cost of a new home is 37 percent lower.

Meanwhile, Moorhead's median household income exceeds Duluth's by 18 percent. So the higher cost of housing in Duluth doesn't correlate to its residents' financial means.

But most new homes in Duluth are built on relatively large lots, skewing its prices upward, Schuettler noted. Out of 35 new local home sales used in the comparison, only four were built on lots of less than one-third of an acre.

Lots in other markets were generally smaller and therefore often less expensive.

Due to its topography, many homes in Duluth also feature more-expensive designs, such as split-level houses with walk-out basements built into a hill. Schuettler said that in cities with flatter terrain, many homes are built atop a concrete slab installed on grade — making for more economical construction.

Maranda DeSanto, chief executive officer of Lake Superior Area Realtors, said members have been seeing a lot of demand for homes around the $200,000 mark, and that market segment has been tight.

Using a couple cost comparison tools for construction, Schuettler said the expense of materials in Duluth appears to be in line with peer communities. Duluth's labor costs are a bit on the high side, along with those of St. Cloud, but Schuettler said they're not far off.

Data from two respected estimation services — Craftsman and RS Means — indicates that, given similar sites, construction costs in Duluth are pretty much on par with those of other similar-sized cities.

The models don't account for site differences or administrative fees, however.

To put up a $200,000 house in Duluth, a homeowner could expect to spend about $5,247 on permits and utility connections, Schuettler found, noting that's on the upper end of the spectrum.

In contrast, a homeowner building a home of the same scale in Moorhead would incur just $1,190 in similar charges. That's less than one-quarter of the Duluth cost.

However, Duluth is not a total outlier. Schuettler found that St. Cloud and Rochester, respectively, would charge $6,016 and $4,915 in fees for the same permits and hookups.

DeSanto said it's helpful to have some data-driven market analysis.

"Up until now, a lot of our conversations have been really anecdotal. People have said it's this, that and the other thing. And it actually turns out it is this, that and the other thing," she said.

While there appear to be no easy answers to the high cost of housing in Duluth, DeSanto remains optimistic.

"It would be so much nicer if we could point at two or three things and say: 'Here are the reasons, let's address these,' but what this study shows is there are a number of different issues. That doesn't mean we can't look at those individually and address them. It just means there's more work to be done than if there were one or two slam-dunk changes we could make," she said.

Because of Duluth's often-challenging topography, and the fact that much of the city has already been built out, Schuettler said the city has failed to attract large-scale housing developers who can put up 50 or so economical homes at a time.

"Duluth's new housing market does lack the products that are built in other cities," he said. "We just don't see these big new subdivisions of small single-family homes being built on grade."

Eliason doubts that's likely to change any time soon.

"I think for Duluth proper, we probably won't ever see those big-box builders," she said.

She said the Northland builders her organization represents specialize by and large in custom construction, and given the costs involved in their work, the tipping point for financial stability is at about $300,000 to $320,000 per home.

When it comes to building more moderately priced houses, she said: "The economics of that does not work out."

Eliason explained: "Being a custom builder versus a production builder, those are two vastly different things. Obviously you can get the economies to drop down to more of a moderate price if you're building more homes. But we don't have the space in the city to do that right now. Even the developments that are happening are still at a scale that the national builders wouldn't even consider."

But that could change, said Adam Fulton, manager of Duluth's community planning division, noting that there are some undeveloped tracts of land that may be suitable for large-scale housing development.

"I have optimism that it is possible. And it's just a matter of us really trying to align the city priorities around infrastructure expansion and infrastructure utilization with site ability. We have lots of competing priorities in Duluth, ranging from environmental protection to economic development to new housing," he said, adding that the city's emerging new comprehensive plan could provide useful guidance.

To meet demand for single-family housing, Duluth can't count on new construction alone. It also will need to find a way to preserve and refresh its large stock of older homes.

But that can be an expensive proposition.

Looking at pre-existing Duluth homes with three bedrooms and two bathrooms that are no more than 1,800 square feet in size, Schuettler found that the average sales price for such houses over the past few years has been about $167,000.

"If you then go through the complete list of possible renovation costs that we identify in the report, you'd start getting more than $100,000 in upgrades, and all of a sudden, it's pretty dubious as to whether it's a good proposition to do all those renovations or not," he said.

"Of course, not every home is going to need that whole slate of renovations, so it's going to vary a lot. What makes sense and what doesn't is going to be a case-by-case thing," said Schuettler, adding that it's tough to draw generalized conclusions.

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