Developers stampeded to get grandfathered before new requirements took hold, will the pipeline run dry?

In December, Portland’s City Council adopted one of the nation’s most sweeping inclusionary zoning requirements.  Most new multifamily housing projects will have to set aside 20 percent of their units for families earning less than 80 percent of area median income (or alternatively 10 percent for families earning less than 60 percent). While the ordinance is intended to increase the supply of affordable housing, it creates a major burden on new developments, and may therefore actually reduce the housing supply. We and others will be watching closely to see what happens.

The measure took effect on February 1, 2017, giving developers a narrow window to file land use applications prior to the new rules taking effect. As of February 1, the city had an inventory of development approval requests for nearly 19,000 units of housing, about a 3-4 year supply given the rate at which new multi-family housing has been built in Portland in the past several years. Developers of these projects have until 2020–and if they nurse their projects through the permitting process, even longer–to move forward with their construction plans.

Last week, Portland’s Bureau of Planning and Sustainability released a short report describing some of the results of the first six months of experience under the new inclusionary zoning ordinance.Writing for Portland for Everyone, Michael Andersen has a very upbeat, glass-is-half full story stressing the 60 or so affordable units that might be attributable to the new ordinance (if they move through the permitting process and actually get the promised incentives). Last week, City Observatory attended a meeting of city staff and other interested parties that reviewed the report.  Here’s what we learned.

So far, between the glut of projects filed just before the new rules took effect, and the uncertainty and cost associated with the new requirements, new private apartment development proposals in Portland have all but disappeared. Since February 1, according to city officials, there have been no new private apartment projects of more than 20 units submitted for land use review. Five publicly sponsored projects are moving forward, and three projects permitted under the old rules have submitted new applications seeking the density bonuses and parking requirement waivers available under the new inclusionary ordinance.

Smaller units and the small building exemption

The new inclusionary zoning rules appear to be creating incentives for developers to “go small” either to avoid the inclusionary zoning requirements entirely or to minimize the cost of compliance. At the city-sponsored meeting to review the first six months of progress under the inclusionary zoning ordinance, several observers pointed out that the projects that seem to be going forward under the new law are coming from developers of “micro-apartments”:  very small studios. The city’s ordinance requires that “inclusionary” units be comparable in size and amenities to a building’s market rate units, so if a developer builds tiny market rate apartments, it faces comparably smaller costs of building its “affordable” ones. Meanwhile, it may be able to qualify for the full value of incentives (parking waivers, floor-area bonuses, and property tax exemptions).  City staff agreed that micro-apartments are more likely to be financially viable under the inclusionary zoning program than are larger apartments.

Some developments may avoid the new inclusionary requirements entirely: the city’s inclusionary zoning ordinance applies only to buildings with 20 or more units. City officials are looking to see whether there’s been an increase in applications for 15- to 19-unit buildings.  Data for the first six months of the inclusionary program (February 1 to August 1, 2017) show that 10 projects of 15- to 19- units were submitted.  In the previous 12 months, the city permitted 16 units in this size group. This fragmentary data suggests that on an annual basis, the number of such units permitted has increased 25 percent (from 16 units per 12 months to 20 units per 12 months).  Given the time lags in developing projects and seeking permission, however, its unlikely that the market has yet had time to react to the under 20 unit exemption. City staff will want to track this statistic closely in the months ahead.

For the immediate future, the city’s housing supply and rental affordability will benefit from the land rush triggered by the inclusionary housing requirements. It will take two to three years for developers to construct the 19,000 or so units that are now grandfathered under the old rules. As this inventory is gradually liquidated, however, the big question is whether developers will step forward and propose projects under the new requirements.

What to watch for

The key measure of program success will be whether new privately sponsored apartment projects move forward. If Portland doesn’t start seeing proposals for new 20+ unit developments soon, that’s a bad sign. It will mean that developers are being deterred by the cost and uncertainty associated with the inclusionary housing requirements.

A dearth of new apartment projects would be the clearest signal of trouble, but there are a couple of other measures to look at as well:  First, how does what happens in Portland compare to what happens in the rest of the region? Portland’s housing market is regional, and while city locations are in high demand, it’s possible that some development could shift to other locations. In effect, the region’s suburbs represent a kind of control group: none of them has a similar inclusionary housing requirement. If apartment construction proceeds apace or accelerates in nearby suburbs (some of which abut Portland), while stagnating in Portland, that would be a sign that the inclusionary zoning program is pushing development away.  It would be ironic if a program that labels itself “inclusionary” actually has the opposite effect by excluding housing and additional population from the city.

Another indicator of impact is what kind of units get built in Portland.  If the new development projects are disproportionately under the 20 unit threshold, or if new projects skew heavily toward micro-apartments, that would be an indication that the inclusionary zoning requirements are warping the housing market. Incentivizing developers to stay under 20 units may mean that some sites that could accomodate greater density are under-built, which essentially wastes public resources and promotes sprawl. Similarly, encouraging developers to build more micro-apartments may push down the price of studio apartments, but will do little to help the affordability of larger units which can accomodate families.

Finally, if it’s concerned about the impacts on housing supply, the city ought to be carefully monitoring changes in land prices. It’s often argued that inclusionary requirements won’t affect development because developers will simply bid less for land, effectively passing at least some of the cost of compliance on to landowners. If that theory is correct, we ought to observe a lessening in prices paid for land that could accomodate apartments in Portland.

In short, its too soon to tell what the effects of the inclusionary housing mandate will be. The negative effects of the ordinance will be concealed and delayed by the big backlog of housing permitted under the old rules. But when that inventory is gone, the real effects of the ordinance will be more apparent.