The Runaway Cost of Portland's Affordable Housing

The Joyce Hotel: A Model of Success or a Cautionary Tale?

Authors: Tyler Johnson, Rob Marton, and Greg Frick

As cities and states strive to build affordable housing, they must learn from the successes and pitfalls of others. The City of Portland, for instance, has recently touted the allocation of all funds from its affordable housing bond, approved six years ago in its creation of 1,859 units. But unfortunately, while the efforts to create housing for vulnerable communities are commendable, the execution leaves much to be desired.

The City’s Bond Oversight Committee (BOC) recently released its 2022 report, which stated that the Portland Housing Bureau had exceeded the original 1,300-unit production goal by 43%, resulting in 1,859 permanently affordable homes.

The report states that the cost to taxpayers per unit is an average of $373,000. However, according to a report from the City’s budget office, the actual price is closer to $490,000, with $150,000 as the average City subsidy. The budget office analysis, issued in October 2022, also stated that “…constructing 20,000 units of affordable housing could cost approximately $9.8 billion and, based on PHB’s current contribution levels, could require a direct City subsidy of $3 billion.”

There have been previous concerns about transparency and the accuracy of the City of Portland’s reports. In one instance, the Inclusionary Housing (IH) Calibration Study Work Group discovered that the city counted inclusionary zoning (IZ)-regulated units in bond-funded and low-income housing tax credit-funded projects as part of their “affordable units produced by IZ” count. This practice was deemed questionable by experts claiming it inflated the program’s perceived productivity while neglecting to account for any reduced or undeveloped densities in Portland as developers worked to find loopholes in the requirements and sometimes built fewer units than they were allowed under current zoning.

Here are just two recent examples of The City of Portland's runaway spending:

• This week’s opening of The Joyce Hotel at 322 SW 11th, a 66-SRO former flophouse, for $383,463 per unit or $945 per square foot. These 250-square-foot studios offer kitchenettes and shared baths. Whether the renovation costs include the hundreds of hours of City of Portland staff time needs to be clarified.
  
  
• Near the Joyce Hotel is the current ongoing renovation of the Fairfield Apartments at 1103 SW Harvey Milk Street. This asset will be converted to 82 affordable housing units for $482,000 per unit or $1,300 per square foot. Most of these refurbished apartments will be SROs without kitchens or private bathrooms.

Managing Affordable Housing Communities is Expensive and Time Consuming

What’s worse, we cannot even be sure that once the city's housing projects are open, our government can ensure residents' safety. Consider a June 7, 2023 Willamette Week story about a $28.4 million, 159-unit low-income apartment complex with city oversight that has “descended into chaos in just two and a half years.” Tenants refer to the community as “a living hell” with nonresidents shooting drugs on the stairs, smoking fentanyl in the elevators, and vandalizing plumbing.

The pitfalls faced by Portland’s Housing Bureau offer valuable lessons for other cities and states seeking to build affordable housing. Portland’s costs far exceed the market-rate norm for workforce and luxury apartments. According to third-party data from CoStar, the average price per unit of an average apartment sold in Portland from 2017 to 2022 was $220,261. The average cost of newer, luxury and high-end apartments was $314,363. It’s easy to see that the City’s affordable housing costs of $490,000 per unit offer a window into bureaucratic inefficiencies.

Affordable housing is a complex issue that needs serious solutions. Unfortunately, city, regional, and national leadership is afraid to change. It’s time to try something different. Putting policies in place from the municipal to the federal level that penalize rental housing providers does not make sense when it is clear that public housing development costs are not in line with the market.

The goals of our affordable housing projects need to be refocused. We suggest this two-pronged approach as a solution:

• If the goal is to house people in need, cities and states should consider purchasing existing housing stock and maintaining affordability rather than developing new projects. This would allow the government to leverage savings to accommodate more people in need quickly and permanently.
  
  
• To reduce overall per-unit costs, our city, state, and federal government should award and allocate funding to developers with a proven track record of building new quality housing at a lower price per unit.

Portland, specifically, must improve and streamline its permitting process. The average permitting time in Portland is excessively long. Even Willamette Week complains that Portland’s affordable housing developers are subject to “Soviet-style bureaucracy.”

As cities and states tackle affordable housing, they must learn from Portland’s excesses and mistakes. Reevaluating the approach to affordable housing and ensuring accountability in spending tax dollars is crucial to meeting the needs of low-income and houseless residents. If the Portland market builds apartments for less than $490,000 each, the City of Portland should, too.

Tyler Johnson, Greg Frick, and Rob Marton are partners at HFO Investment Real Estate, a brokerage specializing in multifamily assets throughout Oregon and SW Washington.