Good Jobs, Zero Bedrooms

Employment is booming across greater Minnesota, but acute housing shortages threaten the prosperity.

Good Jobs, Zero Bedrooms

At 35, Tyler Pedersen considered himself fortunate to move into a retirement home. After accepting a job offer at Digi-Key Corp., a $1.7 billion electronic components distribution company in northwestern Minnesota, the North Dakota native had three weeks to find housing.

“My mom is of retirement age and called around every place in town and couldn’t find anything,” Pedersen says. He ended up paying $550 to stay for a month at Oak Lodge Retirement Home in Thief River Falls. But, he says, “I think the retirement home thought it was her who was moving in. I got lucky.”

Pedersen is one of many Digi-Key employees who have been forced to be creative finding housing in the thinly populated area; employees have lived in motels, campers and even in tents during their transition to more permanent housing.

“Every month, we hear employees say that finding housing is a challenge,” according to Rick Trontvet, Digi-Key’s vice president of administration and human resources. “Since 2010, we’ve noticed more and more that housing is becoming a bigger issue.”

Statewide shortages

Since 2009, Digi-Key’s sales have increased by 58.3 percent and have added an additional 987 jobs in Thief River Falls. But the availability of new housing hasn’t kept up. The city says it needs 100 more units per year until 2020.

Digi-Key and Arctic Cat Inc. are the two major employers in Thief River Falls and employ a combined 4,300 people, or roughly half of the town’s population. Nearly 2,000 live outside Thief River Falls; the average commute for Digi-Key employees is 16 miles, while several employees from both companies have commutes of more than an hour, in an area where rush-hour traffic barely exists.

Roseau, population 2,600, is another rural town with a major employer, in this case, Polaris Industries Inc. Nearly 2,300 workers commute an average of 30 miles into Roseau, according to the city’s most recent housing study from 2012. Polaris alone employs 1,550.

These global companies are among several large employers across Minnesota still based in the small cities where the founders began the businesses. Although growth is steady and employers are continuing to hire, the housing market hasn’t responded, putting strain on rural economic concerns that rely on a large, primarily blue-collar, workforce.

Skip Duchesneau, president of developer D.W. Jones Inc., based in Walker, Minn., has had a hand in several housing projects across the state. A common theme he’s run into in a part of Minnesota that desperately needs more housing, he says, is that construction costs have continued to increase over the past couple decades, but rents haven’t kept up with inflation, sapping the return on investment.

1016-GoodJobs_S02.jpg Digi-Key employee Tyler Pedersen’s solution to the housing shortage in Thief River Falls is to bed down at an elder-care facility

“Workforce housing” describes housing needed in communities that have more employment opportunities—often from one or a handful of large employers—than people to fill the spots, due to a lack of places to live. Although affordable housing—in which rent is capped and eligible renters must earn below a certain threshold—is defined in federal and state law, there is not a consistent definition across states as to what constitutes workforce housing. Often, a community in need of workforce housing must have a certain population size and enough employment opportunities to be eligible for government funding to build more such housing.

In 77 communities across the state—from Worthington in the south to Roseau in the north—between 4,500 and 7,500 additional units are needed to create a more balanced rental market, according to the Minnesota Housing Finance Agency, a state agency that finances affordable housing for low- and moderate-income Minnesotans. That means those communities, which have rental vacancies of zero to 2 percent, would need a rate closer to 5 percent to create such an equilibrium.

Disappearing Housing = Disappearing Jobs

Take a look on any popular real estate website and you’ll see little rental availability in Thief River Falls and other hubs across the state.

“We’re going to reach an economic ceiling if we don’t address our housing needs,” says Bradley Chapulis, Worthington’s director of community and economic development. “If we are not providing for our employers, they at some point in time are going to have to make a hard business decision on where they’re going to invest their capital.”

Some companies have already reallocated growth elsewhere. Digi-Key, for example, added 325,000 square feet in Fargo, N.D., in 2014, in part because it could recruit employees quicker to a larger city. It currently has 90 employees in Fargo, and that number will continue to grow if a lack of housing in Thief River Falls continues to be an issue, according to company president Dave Doherty. Although Arctic Cat spokesman Kale Wainer said a lack of workforce housing in Thief River Falls was not a factor in the company’s decision to expand to other areas, Arctic Cat moved its headquarters to Plymouth in 2009, is expanding in St. Cloud and moving its headquarters this summer to Minneapolis’ North Loop to accommodate a workforce that wouldn’t be able to find a place to live in Thief River Falls.

The problem, as a number of government officials and developers told Twin Cities Business, is that as building costs have increased, private investors are wary of taking development risks in communities that rely heavily on a tiny number of employers to sustain them.

Simply put, “the economics of building housing in rural Minnesota (and rural America) does not work,” said Todd Peterson, Roseau’s community development coordinator.

1016-GoodJobs_S01.jpg On the production line at Digi-Key.

Benefits misdirected

Although state and federal programs to support low-income housing have been in place for years, communities are footing fairly substantial bills to persuade developers to build housing for individuals who earn too much money to be considered low-income.

One tool that rural communities have used is tax increment financing, or TIF, which uses the increased property taxes that a new development generates to finance the costs of development. TIF is commonly used for affordable housing for families with low to moderate incomes.

But many times, TIF doesn’t work for employees such as assembly line workers, who are caught in a bind. If a spouse works, that can push household income above the amount to qualify for affordable housing. But even though they earn too much for income-restricted housing, often it’s still not enough to cover a mortgage or average to high rents.

“The only vacancies you’ll find in Thief River Falls are income-restricted ones, and there aren’t many in town that qualify,” according to Christine Anderson, Pennington County’s economic development coordinator. “We’re really the only community in Minnesota that does not need affordable housing. We need market-rate workforce housing.”

Anderson is the area’s primary facilitator for development plans and has several housing projects in the pipeline for Thief River Falls, but she says city officials prefer tax rebate programs and those offered through the Minnesota Department of Employment and Economic Development (DEED), because they’re not tied to income restrictions like TIF often is.

West River Falls Estates by D.W. Jones is a new residential development in Thief River Falls; one building opened in July, the other will open in December. It’s part of a pilot program through DEED’s Workforce Housing Pilot Program, which provides grants to Greater Minnesota communities that want to build market-rate residential rental properties to accommodate the locality’s workforce.

Even though DEED awarded Thief River Falls $400,000, the project got off to a rocky start. Since it required the developer to pay prevailing wages, labor costs would have meant a losing proposition for D.W. Jones, according to Anderson. To sweeten the deal, the city, Pennington County and its school system matched the grant with $400,000 in tax abatement for public infrastructure, which—combined with DEED’s money—offset project costs by 7.6 percent.

“Without that $800,000, this thing would have died,” says Duchesneau. That same property would have been appraised at a far higher price if it were in the Twin Cities.

Duchesneau, whose company has built several affordable housing units in Greater Minnesota that rent at 60 percent of the area median income, said it’s more attractive for developers to build a two-bedroom unit in the Twin Cities at $1,200 per month in rent than build the same unit in a smaller area like Thief River Falls, where rent may only be $800.

Roseau is also a part of the pilot program. It received $819,000 to build a 30-unit building called Parkland Place Apartments, which opened last year, when the Legislature approved $2 million for the Workforce Housing Pilot Program. Two projects were awarded—$620,000 to Perham to construct a 24-unit apartment building, and $1 million to Duluth to build a 72-unit apartment building. The remaining funds will be awarded in December.

But, according to Duchesneau, DEED’s program is “not making a big difference fast.” He said rural communities lacking workforce housing need immediate help from state and federal assistance programs, but eventually those communities will be able to support themselves.

Another approach was suggested by the Greater Minnesota Partnership (GMNP), a nonprofit that advocates for state economic development policies and resources for Greater Minnesota. The GMNP lobbied for workforce housing tax credits in 2015 and 2016. The 2016 GMNP proposal gave a tax credit of 40 percent on investments up to $1 million. The Senate supported a workforce housing tax credit and included it in its tax bill, according to Dan Dorman, GMNP’s executive director.

Dorman said the proposal had bipartisan support, but it didn’t make the cut in the final compromise tax bill.

GMNP says that workforce housing programs administered by DEED should receive as much attention as those programs that focus on housing affordability, which are administered by the Minnesota Housing Finance Agency.

“As we note to legislators, jump-starting stalled local housing markets requires that we do not target yet more funding at low-income housing in Greater Minnesota, when the primary, urgent need in Greater Minnesota is for workforce housing for middle-income workers,” Dorman says. “For example, an average family in Roseau makes almost $73,000, far above the $62,000 required to live in low-income housing. It’s not that workers are paid too little in rural Minnesota, it’s that workers there with moderate incomes cannot find housing.”

Minnesota housing receives roughly $13 million per year in state appropriations for its Economic Development and Housing Challenge program, created in 1999 at a similar time, when employers were looking to expand and the rental market was tight across the state. “We typically receive requests for more than three times the amount of funding we have available,” says Megan Ryan, MHFA communications director. “The demand for workforce housing far exceeded available funding [last year], to the tune of $17 million.”

The Urban Land Institute’s Terwilliger Center for Housing, based in Washington, D.C., conducts research on workforce housing. “Workforce housing has become a pressing concern in more parts of the country in recent years, as rents have risen and wages remained stagnant,” says Stockton Williams, executive director.

Williams says burdensome housing costs—when families pay more than 30 percent of their income for rent or mortgage—are growing fastest for households earning between $30,000 and $50,000. Overall, more than 11 million low- and moderate-income working households nationwide are paying more than half their income for housing.

Short-circuiting the market

To address the shortfall, rural community groups and businesses nationwide are taking matters into their own hands.

  • Earlier this year, the nonprofit Worthington Regional Economic Development Corp. established a Rental Housing Challenge Fund to encourage the business community to play a financial role in creating market rate rental housing in Nobles County. The city says it needs 500 more units by the year 2020 to sustain the growth it had over the past two decades. Only 147 housing units were added from 2000 to 2010, despite a population growth of 1,481; 578 were required to keep the city at the U.S. Census average of 2.58 people per household. Its rental vacancy rate has hovered at zero since 2000.

    Worthington’s JBS Pork plant, which employs 2,300 in the city of nearly 13,000, has been a key driver of growth.

    As of May, JBS had contributed $50,000 and First State Bank Southwest had given $10,000 to the Rental Housing Challenge Fund. Worthington and its Housing and Redevelopment Authority chipped in about 40 percent of the cost of a $6.5 million, 48-unit townhouse complex called Rising Sun Estates, completed last year.

    Chapulis said it’s been hard to attract investors because the much of the city’s existing housing stock is old, and rents haven’t risen.

    “We did pretty well during the recession. None of our employers laid off individuals or closed shop,” he says. “But investors still didn’t come, because there was a large increase in cost of construction versus rents that could be collected.”

  • Roseau has worked with MHFA’s Challenge Grant program to help a developer build a 41-unit mixed-income development called Tamarack Place Apartments, set to open this summer. In addition, the Polaris Foundation, the philanthropic arm of Polaris Industries, contributed $300,000, as part of its goal to attract and retain top talent, according to spokeswoman Kelly Basgen.
  • Less than 30 miles away, in Warroad, Marvin Windows and Doors maintains leases on several apartments to help 25 seasonal interns with housing, according to public relations manager Emily Finley. Roughly 2,000 of the company’s 5,000 employees work in Warroad, which has a population of less than 2,000.

On work days, Digi-Key employee Craig Winters says goodbye to his wife and two young kids at 9 a.m., drives five miles to a bus stop, and doesn’t return home until nearly 11 at night.

Winters is one of 100 Digi-Key employees who take the company’s free buses that run from Grand Forks, Crookston and Bagley—60, 50, and 70 minutes away respectively. These distant commuters receive a starting pay premium of $2 an hour and work a four-day week with longer shifts.

He’s weighed the benefits of living in Thief River Falls, but he says he can’t justify paying an average of $920 a month in rent when he can pay roughly the same in Grand Forks, which has six times the population, and more going on as far as night life and leisure activities, as well as more educational opportunities for his kids.

“It’s rough, because housing is expensive,” says Winters, who works as an order fulfillment picker.

Doherty, who took over the reins as president last year, wants private investors to know that Digi-Key won’t up and leave the community. “We’re not a flash in the pan,” he said. “Our revenue has been steady and consistent. We’re committed to this area.”

Raya Zimmerman is a Minneapolis-based writer.

Shakopee’s Challenge:

Suburban Workforce Housing

E-commerce giant opened its expansive new fulfillment center in Shakopee this summer; the facility is ultimately slated to employ 1,000. While the city welcomes the global retailer to Scott County, it brings new challenges to the southwest metro community: Is there anywhere in town for Amazon workers to live?

“Housing has definitely been a challenge,” says Samantha DiMaggio, Shakopee’s economic development coordinator. “This is the first time that Shakopee has ever had to import workers.”

Amazon declines to comment on what it pays its workers. “Wages vary depending on the position,” spokeswoman DeAnn Baxter says. “Typically, fulfillment center associates make 30 percent more than traditional physical retail store employees.”

Richfield-based developer MWF Properties proposed a workforce housing project on a Shakopee horse stable site last year. The original plan called for 60 apartments, with the potential to build another 60 units later, but the Shakopee City Council voted against rezoning the site.

MWF changed course to a new site, pitching 57 workforce units not far from a Target store. The council approved the project approved earlier this year, but it’s not clear when it will begin construction. DiMaggio says that the project is slated for the single parcel of land that is currently zoned for multi-family projects. She adds that other developers are scouting some sites for more-expensive market-rate apartments.

“Workforce housing” has become a buzzword in real estate and urban planning circles. It is generally considered to be housing for employed residents who make too much money to qualify for affordable housing, but not enough to afford market-rate options.

A city report outlined the shortage of sites zoned to allow for apartments in Shakopee: “The city currently has one parcel of vacant land guided and zoned for higher-density multi-family residential development. . . . For development of multi-family housing to occur, the city will need to rezone parcels that can accommodate multi-family development or redevelopment.”

In recent years, Shakopee has added several new projects anchored by national companies like Shutterfly Inc. and Emerson Electric Co., which have bolstered the city’s job base. In August the Minnesota Valley Transit Authority began running a pilot express-bus service between the Mall of America and Shakopee, adding a new transit option for workers who don’t live in Scott County.

Between 2000 and 2015, the population of Shakopee nearly doubled. Census data from 2015 estimates the city’s population at 39,981 residents among 13,459 households.

At the end of 2015, a survey of the combined market for Shakopee, Savage and Prior Lake found only 17 vacant apartments among the 962 units surveyed. Minneapolis-based Marquette Advisors found the vacancy rate in that market to be a very tight 1.8 percent. (The analysis only tracks market-rate units.) Marquette found the average rent in Shakopee—$1,042 per month—almost identical to the metrowide average of $1,053 per month.

The issue is a challenge for all of Scott County. Developer Ron Clark fought strong resident opposition to move ahead with the 66-unit Village Commons, a workforce housing project in Savage that opened in 2013. Clark, owner of Edina-based Ron Clark Construction & Design, says that his firm has a waiting list of more than 1,000.

“The demand is there,” says Clark. “We just stay full all the time.”

—Burl Gilyard

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