Abundance of rental signs could mean change in Duluth's housing market, reducing sub-par rentals

Although uncharacteristic for early September, the eye-catching abundance of "for rent" signs sprouting out of yards in the Central and East Hillside neighborhoods may be a sign of a change professionals in the rental market say could weed out slum landlords and eliminate substandard living conditions for renters.

The cause of the change in the rental market is difficult to pinpoint.

"Basically, in a nutshell, it's the old roller coaster of supply and demand," said real estate broker Joe Kleiman, of Kleiman Realty.

Kleiman has been in the business for 35 years and said that the rental market, just like any other business, is hard to predict.

"It will all go on in cycles," Kleiman said. "All of these things are not new. These things continually happen. Typically, there is a big demand and a short supply until more units satisfy the demands. A lot of investors saw this big demand, and everyone got dollar signs in their eyes, but a lot of that was after the fact, so they are out to buy houses and all of a sudden we have less demand."

Kleiman says changes in the market, like the sudden crop of for-rent signs, will weed out the landlords who are not up to par with city codes.

"If you're not a good operator, the market is going to take care of you," Kleiman said.

Ken Truscott, of Prudential Truscott Realtors in Duluth, has been in the rental market for 17 years and believes there are varied reasons for all of the signs, like the attention rentals have received from the city and out-of-town parents buying homes for their college students.

"We had a noticeable increase in activity in people looking for rental property to buy, and it was typically single family homes for a son, daughter, relative or friend who is going to school here," Truscott said. "At this point, there is a flood of rental property available not because more rental property has come on the market, just there are more and more parents that realize buying a home and having their relatives live in it is far more economic."

Buying a home and having another family member live in it is known as relative homesteading. Often in college towns parents will buy a house and rent it out to their student and their student's friends to pay the mortgage.

Truscott said the change in market is going to cause a shakeout of the substandard properties and will coincide with the Mayor Herb Bergson's initiative to clean up rentals.

Truscott did rent out his 32 properties for the year but said he made a couple of price adjustments to stay competitive in the market and to make his properties more attractive.

"There are ample signs, to say the least, and it's too late now," Truscott said. "The people that are going out to the college students, it's too late."

The University of Minnesota Duluth off-campus housing Web site has seen a drastic increase in the number of rental properties advertised on its site since 2000.

For the year of 2000-01, beginning in July and ending in June, the Web site listed a total of 247 rentals. The Web site more than doubled that number from 2003-04, listing 689 rentals.

"I've seen a lot of vacancies and we've had information from people who do have listings with us, and they are complaining that they aren't getting rented," said Senior Administrator Mary Jo Bowman, who maintains the Web site for UMD.

For $45 dollars, landlords can advertise available rental units for three months.

More conversions to blame?

To assume an increase in single-family units converted to rental-occupied units is to blame for the for-rent sign influx would be inaccurate, said Darren Jablonsky, from the St. Louis County Planning Department.

The 2000 census found 525 single-family units were added to the rental-occupied housing stock between 1990-2000. Proof of an increase in conversions won't be available until the next census.

Reports from the St. Louis County Planning Department do, however, show an increase in the vacancy rate, as well as an increase in the number of licensed rental units.

In September 2003, a St. Louis County Planning Department survey found the vacancy rates of Duluth rentals to be 4 percent, up 1.4 percent from 2002. The survey also found the average rent in 2003 to be $602, up $130 from the pervious year.

Jablonsky is finalizing the 2004 Duluth Market Rental Rate report, scheduled to be released in October.

"This is our third year doing the survey, " Jablonsky said. "The purpose is to track the number of licensed units by structure type. Since 2002, there has been a 600-unit increase in the number of licensed rental single-family homes."

Jablonsky said there has been an increase in licensing of all types of rental units, as well.

"In two years, it's an increase, but it doesn't mean there are new units," Jablonsky said.

Economy and low interest rates

Kathy Roseth is an office assistant in Duluth for the Minneapolis based company Enterprise Consulting. The company manages several rental properties in the area.

Roseth said renting out the company's units has not been a problem, but she has heard the market is soft.

"Everywhere I look there are signs everywhere," Roseth said. "I shot across Fourth and Woodland and right across Woodland Middle School there must be at least 15 signs in a two block radius. That never used to be like that."

Roseth said she has not had a problem renting her places because of an increase of low-income families. People moving from places like Chicago say the welfare system in Duluth is better than other places, and they have a better chance of receiving Section 8.

Tammy Domstrand works in Minneapolis as the Operations Director for Enterprise Consulting. Domstrand said the high number of rentals could be one part of the economy and interest rates.

"We're having the same experience in Minneapolis as Duluth," said Domstrand. "Because of interest rates being so low, people are buying their own home. Low interest rates definitely affect the rental market."

Domstrand said with renters having more options, landlords will be forced to spruce up their units to compete in the market.

Have landlords out-priced the market?

At a recent meeting, Housing Access Center's executive director Terri Roeber was informed that five large homes in the Woodland area that are traditionally rented out to college students are sitting vacant.

"I think what we're beginning to see is that the landlords have raised their rents the last couple of years and have made the affordable market rate nonexistent," Roeber said. "Landlords have out-priced the market."

The Housing Access Center, which Roeber describes as a "one stop shop" for housing, works with tenants and landlords to resolve problems before they end up in court and helps people find housing.

Despite all of the for-rent signs, Roeber thinks the center is helping even more people find housing than before. But she predicts the market will change in the next two years.

"You get tight markets, you get lose markets," Roeber said. "I think some of the landlords who have bought up homes for student rentals will begin selling them to families. I think we have an inflated market, and I think it's going to level off, so that some of these houses are going to become affordable."