As the price of housing continues to rise in many cities, one popular progressive policy idea to address it is inclusionary zoning. Inclusionary zoning requires that a certain percentage of units in a building be priced at below market, targeted at people who earn some fraction of the area median income. Often this set aside is required in exchange for density bonuses or other things the developer might want.
Portland passed one of these, and according to a report in the Portland Mercury, construction fell off a cliff:
A year ago, Portland City Council enacted “Inclusionary Housing” (IH), a new policy requiring any apartment building of 20 units or more to rent a portion of them below market rates—from 30 to 80 percent of the city’s median family income, depending on the option a developer selects.
When the city implemented the policy, detractors warned the new rules would simply ensure developers stopped building here. City officials argued IH would force the private market to create much-needed affordable units in Portland’s building boom.
A year into the policy, the detractors seem to be winning. Apartment construction in Portland has fallen off a cliff, though there’s still ambiguity as to whether IH or other market forces are the key reason. Meanwhile, Mayor Ted Wheeler is planning to sweeten the deals that the city offers developers to convince them to build.
So far, IH’s results are underwhelming. According to the city’s Bureau of Development Services, 12 qualifying buildings with a total of 682 units have applied for permits since the IH policy went into effect on February 1, 2017. Under IH, those projects could bring in anywhere from 55 to 170 below-market units, depending on the options their owners select (not all developers have decided, so an actual number of affordable units isn’t clear).
Whatever the case, 682 is a huge drop off for a housing market that from 2013 to 2017 typically built between 3,000 and 6,000 new units per year. And the number doesn’t give the complete picture.
“We’ve seen the spigot turned off so completely, so fast,” says Kurt Schultz, a principal at SERA Architects, who notes that his clients who’ve worked with similar policies in other cities often blanch when told of Portland’s strict IH rules. “I’ve never seen it turned off so fast before, and I’ve been doing this for 30 years.”
I don’t have any real analysis to give on this, but the reporting is pretty stark. Click through to read the whole thing.
Two big pieces of context are missing from this. First, there was a surge of planning, permitting, and building that happened right before the ordinance took effect so the projects could be grandfathered in. This caused the dropoff from before the ordinance to after to look artificially steep.
Second, City Observatory noted evidence last month that a surplus of apartments was causing rents to plateau or even drop year-over-year. (For the record, City Observatory was also very skeptical of the ordinance.) I suspect that the cooling real estate market, not the ordinance, caused most of the observed decrease in construction.
Chris Barnett says
Exactly: apartment valuations work on two things, occupancy/rent levels, and interest rates.
With occupancy rates flattening many places (as the peak of the Millennial generation passes out of the prime apartment age), rents are also flattening. Rising interest rates affect ROI calculations and apartment valuations in the same way that rising interest rates affect bonds, by decreasing their value. So if valuations are not growing (or even shrinking some), the brakes will go on pretty fast.
P Burgos says
Aren’t there some cities that grant bonuses for builders who build affordable housing into a project. That is, something like a rule that allows builders to add 10 affordable units and in return the builder is allowed by right to include 20 extra market rate units? How well do those incentives work? It seems to me like a political trick to get some NIMBY’s to let builders build that might work.
The answer is density. There is no other way to increase supply while constraining infrastructure costs.
Rod Stevens says
A recent study by students at Portland State University claimed that social goals for McLoughlin Blvd. could be for paid with density bonuses, but the price of existing single family houses in that area is so low that no one wants to build new. The most efficient way to provide more affordable housing in nice places is not through not through inclusionary zoning, but by making making more places nice places.
P Burgos says
Is there affordable housing in not nice places in Portland? I have looked at Zillow for NYC, and even in high crime areas homes are priced at $250K, which if you use the old three times income rule of thumb for affordability, implies that the families living there should be making $84K a year. I have not looked at home prices in Newark, so maybe that is where poor people in NYC can find housing?