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Why Rochester's rent prices are 'astronomical'

A Post Bulletin data analysis of the U.S. Bureau of Economic Analysis’ Regional Price Parities data released in December 2021 found that Rochester housing price levels, once 17% below the national average, have been racing fast to catch up.

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ROCHESTER — Chaos. That’s how Brooklyn Haasch, a resident of Rochester for 14 years, described the process of finding a place to live. The rents are “astronomical in this town,” she said.

Haasch, 24, said it can even be difficult to afford the income-based “affordable” housing in town. She recently moved back in with her mom and is trying to save enough to leave Rochester.

“Sometimes you need to get two or three jobs just to be able to make rent in this town,” she said. “I actually have three jobs at this point, and I am still struggling.”

Haasch is not alone.

Over the course of four days, 95 people responded to a query from the Post Bulletin on social media about rising rental costs in Rochester. Many had been impacted as tenants, others as landlords.

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A Post Bulletin data analysis of the U.S. Bureau of Economic Analysis’ Regional Price Parities data released in December 2021 found that Rochester housing price levels were 17% below the national average in 2018. Just two years later, in 2020, housing price levels were only 7% below the national average. 2020 is the latest available data.

Rochester housing price levels are the second highest in Minnesota compared to other metropolitan statistical areas in the state. The Twin Cities metro area is the highest and only metro in Minnesota with housing price levels above the national average.

Rochester residents are feeling the impact of rising rental costs.

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In a phone interview, lifelong Rochester resident Elly Smith shared that she had witnessed spiking rental costs first hand. Smith discovered that her unit's rent was $1,000 with the previous tenant, but she will pay $1,350 as the new tenant.

“The rents are going up as soon as they can get them up,” she said.

The lack of affordable housing is an acknowledged issue in Rochester. According to Olmsted County’s Comprehensive Housing Needs Analysis conducted in July 2020, only 38% of existing renters, on average, can afford the rents in Rochester without being cost burdened.

The City of Rochester and local landlords say there is a supply issue and rental prices will improve if they can build and preserve more units. However, this is easier said than done. There is a nationwide housing shortage, and some say Rochester’s housing regulations can make construction a cost-prohibitive venture.

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National outlook

The U.S. is dealing with an issue of limited housing supply. A report by Statistica states 6.9 million homes were built between 2010 and 2019, whereas in the previous decade more than twice as many homes, 14.6 million, were constructed.

Nick Stageberg, owner of Black Swan Real Estate in Rochester, said as someone who’s dealing with development and leasing that the reduction in home construction has had a local impact.

Changes over the last decade are likely in response to the 2008 housing crash, when many home builders went out of business or scaled back their construction plans, he said. Unfortunately, with fewer homes available for occupancy, the relative demand has increased, which has led to rapid price increases.

Housing developers need to build more homes to meet the demand, but Stageberg said escalating construction costs have been prohibitive for some companies.

For example, the NASDAQ lumber price index quadrupled from May 2020 to May 2021, a result of supply chain issues caused by the pandemic, Stageberg said. In his own work, he has seen construction costs escalate by 25% over the last 18 months.

“We're trying to dig ourselves out of that hole so to speak, and it is extraordinarily expensive for us to do so,” Stageberg said. “It took us a decade to kind of get into this situation. It will take us at least a decade to build our way out of it.”

Realtor Nick Stageberg
Realtor Nick Stageberg, of Keller Williams Premier Realty and owner of Black Swan Real Estate, on Monday, March 28, 2022, in Rochester.
Joe Ahlquist / Post Bulletin

Local challenges

Although rising rental costs are consistent with national trends, Rochester housing costs have lapped other metropolitan areas in Minnesota. Stageberg thinks this is because of the city’s vibrant economy, increasing population and highly regulated environment.

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While many areas struggled during the COVID-19 pandemic, Stageberg said Rochester has seen a tremendous amount of economic consistency on account of the Mayo Clinic. However, as the clinic continues to grow, he said one of its biggest challenges is finding housing for its new hires.

“We have too many tenants and not enough units,” Stageberg said.

Jim Kluth, a small-scale landlord, echoed Stageberg’s observations. He’s noticed a shortage of apartments and homes, which has led to price spikes. Kluth, a Latin teacher in Rochester, has four rental properties – two in Austin, one in Albert Lea and one in Rochester.

Although he is not involved in development, he’s aware that many companies, like Black Swan, are challenged by the red tape around construction in Rochester. With growing tenants and limited construction, it’s been hard to acquire properties. Kluth said part of the reason he’s been building his portfolio outside of Rochester is because property costs are so high here.

Stageberg is intimately acquainted with the city’s “red tape.” He said the city’s new housing regulations have increased base costs significantly. Even when remodeling old units, he said it’s so expensive to bring the unit into accordance with the city code that his team makes cosmetic upgrades so they can market the unit as high end to justify the cost.

“You have to build kind of like ultra luxurious apartments to try to make money at it,” Stageberg said. “And the developers are not. They’re not making money out of it right now. That’s for sure.”

Stageberg thinks the city is trying and the housing regulations are well intentioned. However, he’s concerned that the city doesn’t understand how much the rules inflate the end costs.

Taryn Edens, manager of Housing and Neighborhood Services for the city of Rochester, said that the regulatory code was rewritten to align with the International Property Maintenance code. She is aware that Rochester is a regulated environment, but she said the code is comparable to other communities that have rental regulations.

Edens said the code hasn’t been completely rewritten in more than 40 years. Although Rochester did raise fees in 2021, several of the changes are due to state requirements and are on par with other Minnesota cities.

“When we're making policy determination, we are balancing our priority of protecting the health and safety of residents as well as maintaining affordable housing,” she said. “It's definitely a hard line to walk.”

Limited affordability

All sources interviewed by the Post Bulletin agreed that Rochester lacks affordable housing options. And they want that to change.

Stageberg said he’s aware of the stereotype of the greedy landlord, but he, too, wants housing costs to go down. It’s easier for tenants, and it’s easier for him to lease the unit. “Everybody wants that,” he said.

The county’s Housing Needs Analysis, which was conducted by the Coalition for Rochester Area Housing, identified five housing gaps – one of which is housing for people earning at or below 50% of the area median income, approximately $50,000.

The Coalition, which includes the City of Rochester, Olmsted County, Destination Medical Center, Rochester Area Foundation and the Mayo Clinic, is working on a myriad of solutions to remedy the lack of affordable housing.

For one, they will be working on preserving their current affordable housing stock – generally older rental properties that naturally have lower rents. Another strategy is the 4d Affordable Housing Incentive Program. Eligible Olmsted County property owners can obtain property tax reductions if they agree to keep a portion of rental units affordable for 10 years.

“We’re trying to focus on what are the biggest needs and what we want to change,” Edens said.

Read about how this story was produced.

Molly Castle Work is an award-winning investigative journalist. She has investigated a range of topics such as OSHA and worker safety during COVID-19, racially-disproportionate juries and white-owned newspapers' role in promoting lynchings. Readers can reach Molly at 507-285-7771 or mwork@postbulletin.com.
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