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– Anyone driving through this historic Dodge County town 18 miles west of Rochester would get the impression from its saloons, antique stores and the stone walls of the Hubbell House restaurant that it’s little more than a tourist hamlet.

A short trip into the adjoining township leaves an entirely different impression: newer homes built with three-car garages on lots ranging from a half-acre to six acres, with expansive, well-kept lawns. These homes cater to the professionals spilling out of Rochester’s Mayo Clinic and an expected employment surge coming from a massive, five-year-old development initiative called Destination Medical Center.

DMC is a 20-year, $5.6 billion investment from public and private sources designed to make Rochester a magnet for biomedical research and other tech firms seeking to grow alongside Mayo. It’s forecast to create 28,000 jobs by 2034.

A year-old regional economic study commissioned by the Southeast Minnesota League of Municipalities noted that DMC will lead to a boom in housing construction, but that will still leave a gap of 14,100 new housing units needed across Dodge, Fillmore, Goodhue, Houston, Mower, Olmsted, Wabasha and Winona counties.

City and county officials in the region say housing shortages already are driving up prices across the region, though no one can say how much of the increase can be traced to DMC. Few starter homes are being built at affordable prices, and communities outside of Rochester are vying to attract new residents, prompting concerns about sprawl.

Dodge County Administrator Jim Elmquist keeps a close eye on housing issues from his office in Mantorville, the county seat, a city where the entire downtown district was placed on the National Register of Historic Places in 1974.

“If people are looking to find affordability, they’re going to come to Dodge County, but they’re not finding that right now,” Elmquist said.

Data compiled by Minnesota Realtors, a trade group, show that median residential home prices increased 34.5% across southeastern Minnesota from 2014 to 2018, slightly outpacing the statewide rise.

But the increases have not been evenly distributed. Dodge County showed the steepest climb in median residential sales prices, spiking 48% from 2014 to 2018, followed by Olmsted County, where prices rose 37.6%. Mower and Winona counties were at the other end, with increases of 18% and 13.6%, respectively.

A housing study completed last spring found that nearly four in 10 Dodge County residents worked in Rochester, a figure likely to grow as the DMC initiative matures and young families looking for affordable homes turn to nearby communities. Affordable homes, defined as those that cost less than 30% of a worker’s gross monthly income, are getting harder to find in the county, however.

Single-family homes scarce

The vacancy rate for Dodge County rentals was just 1.2% when Golden Valley-based Maxfield Research & Consulting conducted its housing study last year. That’s well below the 5% vacancy rate that promotes competitive rental rates, provides consumer choices and allows for a healthy tenant turnover, the study notes.

Single-family homes also are scarce in Dodge County. The Great Recession stalled the development of new single-family housing, the study says. Building permits dropped from 1,073 new units from 2000 to 2005 to 271 new units from 2014 to 2017. And while builders are now busy putting up new homes, there aren’t many more lots available, and the cost of developing new subdivisions has put a damper on expansion, said Lisa Kramer, Dodge County’s finance director.

Elmquist said it’s getting hard to find a single-family home in the eastern part of the county, which is closest to Rochester, for less than $300,000. If the need for affordable housing is going to be met, he said, it’s going to have to be found in the cities rather than the townships, where residential lots now sell for $80,000 to $120,000.

At a time when many rural towns are shrinking, the city of Kasson, a few miles south of Mantorville at the juncture of Hwys. 57 and 14, has been growing about 1% a year and now has more than 6,500 residents. It has averaged just over 41 new housing permits a year since 2014, according to Nancy Zaworski, the city’s finance director. Currently, the city is averaging six new residential building permits a month, said Amy Johnson, an administrative assistant.

Dakota County officials say growth will likely follow when Hwy. 14 is fully expanded to four lanes between Owatonna and Rochester in the next few years.

Communities around Rochester see DMC as an opportunity, said Mary Blair Hoeft, city administrator for Byron, population 5,770, which is a 10-minute drive west of Rochester.

Rochester’s permitting process has become so time-consuming to navigate that it gives small towns like Byron an edge when it comes to attracting developers, Hoeft said.

“I think the one thing that DMC has done for Byron is that it has pushed the land prices up in Rochester,” Hoeft said.

Byron has issued 303 residential building permits since 2014, an average of 53 a year.

Steve Borchardt, housing coalition director for the Rochester Area Foundation, agreed that red tape may be playing a role. Developers are questioning how they can prepare a municipal lot and market it for less than $70,000 and still make a profit, he said.

Olmsted County is on track to issue a little over half the number of new building permits this year as last year — and that was below 2017’s numbers, Borchardt said.

“So while everybody perceives there’s pent-up demand for new builds under $250,000, there’s very little of it taking place and there’s very few permit pulls for residential development,” he said.

Olmsted County property records show that residential home sales have declined since 2014 in the city of Rochester and in Rochester Township. Meanwhile, prices have jumped. The median price in the city is now $233,129, up from $160,000 in 2014. In the township, it’s $695,000, up from $454,716.

Choosing high density

Rochester Mayor Kim Norton said the City Council has made a conscious decision to emphasize high-density housing over more single-family homes.

“We’re not interested in sprawl,” she said.

That has put upward pressure on existing home prices. In addition, Norton said, many homes get snapped up “and flipped immediately for VRBOs and Airbnbs” that cater to the 3.1 million visitors a year who come to town.

“I think that’s affecting affordable housing,” Norton said. “I’m worried that we don’t have a big-picture plan on how we’re going to handle growth. … I feel a rebellion coming.”

Mike Paradise, president of Rochester-based Bigelow Homes, was co-chair of the Governor’s Task Force on Housing’s ownership committee.

“Our house pricing is fast outpacing our wages and our people’s ability to buy it,” Paradise said. “The biggest thing I see in Rochester right now is the lack of housing diversity and housing selections.”

Midrange properties aren’t getting built, he said. “If we can’t somehow figure out how to build in the middle, the bottom-end market is never going to get any better,” he said.

Dan Browning • 612-673-4493