Affordable Housing Mandate Remains Expensive for Developers, Study Finds

A recent study funded by the City of Portland and conducted by BAE Urban Economics found that Portland's "inclusionary housing" policy requiring some units in new apartments be affordable for low-income tenants is not as costly for developers as initially feared. Instead, the study indicated that other construction factors had a more significant impact on development costs. 

The policy, introduced in 2017, mandates that all new apartment complexes with 20 or more units should keep 20% of rents affordable for people earning 80% or less of the median income, or alternatively, 10% of units for people making 60% of the median income. In return, developers receive certain development fee waivers and 10 years of property tax exemptions for the affordable units.

While the policy seems to work well in the central city due to heightened incentives, it is less lucrative in areas outside the central city's boundaries. The policy has resulted in 1,000 new affordable rental units in Portland since its inception more than six years ago (Feb. 2017). 

In addition to the inclusionary housing policy, the study found that the biggest cost to apartment developers is system development costs (SDCs) which can account for over 6% of total development costs. The study also suggested ways the city could reduce building costs, including:

• An increase in city incentives to offset worsened market factors
• Reducing risk and uncertainty to developers by streamlining permit approvals
• Considering policy adjustments to decrease costs such as reducing required bike parking spaces, system development charges, etc.

Overall the feasibility analysis indicated that at the current time cost increases outweigh revenue increases and that:

• Rents must increase between 15-35 percent, or
• Hard costs must decrease between 15-40 percent; or
• Investor return requirements decrease to pre-pandemic levels (this exact amount was unspecified in the report)

The study revealed that building an apartment in Portland costs 10% more than in Seattle or Sacramento and is 4% cheaper than Denver. Despite these insights, some developers argue that the inclusionary housing policy may have hindered the construction of additional overall units. 

The study also failed to take into account the number of apartment buildings not constructed or built with reduced density to avoid the city's requirements. 

  “At the end of the day, the goal should be increasing overall housing supply,” said Greg Frick, a partner at HFO Real Estate, which sells apartment complexes in Oregon and Washington. “Nobody ever talks about the under-developed housing due to inclusionary zoning. But if the city makes it hard for projects to pencil [out], then it’s going to keep units from being built.”

Frick said he knows out-of-state investors are wary of buying large residential buildings in Portland, due to the frequent policy changes.

“If rules keep changing all the time, they’re going to ask, ‘Why are we investing in this market?’” Frick said. “We can’t just keep putting up roadblocks to that kind of investment."

A volunteer work group comprising housing developers and researchers was set to finalize their recommendations to the city council on July 10th. The City Council is set to hold a work session on housing production on Tuesday, July 25th. The session is 9:30-11:30 am and a live feed will be available here.

Developers we spoke to had plenty to say, including these points:

"The city staff and elected leaders have convinced themselves that IH has been largely successful. After six years and 1,444 units, or 240 units per year 'that would have otherwise not been built' is their mantra and serves to validate the cause. Compare these numbers to the overall housing production need and the substantial amount of development it is hampering! City staff and officials aren't really interested in housing production, only affordable housing production. Permits are taking more than 9 months. “

"We have fully adopted the loophole of building multiple buildings on a single lot, with separate permits, with buildings less than 20 units to avoid the IH. We have done this very successfully a number of times, but it also makes for less efficient, less dense, and less cost effective buildings. All of those factors require rents to go up, to justify those extra expenses. More efficient buildings, market wide, would in theory help drive the cost of housing down, and help to alleviate rising rents.  And if the city could hire staff to get through permits faster, we could also deliver housing faster, also helping take stress off the housing shortage and rising rents."

"Aside from IH, Multnomah County’s inaction regarding crime and homelessness, and high taxes are all factors making us seriously question why we’re building here. The investor community has taken notice and it’s very hard to sell in this city these days. Everyone is fleeing to the suburbs, and investors will follow."

"The MULTE program was an excellent tool and a true carrot that got shelved when IH was rolled out." 

"Rent control eliminates 30% of the capital providers in the market and is a huge barrier to production. The overall regulatory burden in our city is what most capital and developers govt like and what causes them to go elsewhere.  It all adds up."

"When it comes to creativity and innovation, they should look at Clark County. The Vancouver Housing Authority is partnering with private developers on turnkey development. Actively seeking land and courting developer partners."

Read the full OPB story here.