The score so far for Portland’s new below-market-rate housing mandate: 60 homes

That’s not enough yet to dent the shortage of low-cost homes — but it’s probably too soon to know if we could be doing better.

by Michael Andersen | Sept. 20, 2017

A proposed 89-unit building at SE 17th Avenue and Tenino that would potentially include 35 below-market-rate homes under the city’s new program. Rendering: Myhre Group Architects via Portland Bureau of Development Services.

Portland’s new home-affordability mandate is producing new below-market-rate units at only about one-fifth of the rate the city thinks it should be, but it’s possible that the policy will straighten itself out over the next year.

The new “inclusionary housing” rule caps rents for a certain percentage of newly built apartments, in exchange for various project incentives designed to offset losses from those lower rents. If more new homes get built, more price-capped apartments get built too.

Unfortunately, the rate of new building permit applications has dropped about 80 percent from the long-term average. A six-month progress report released by the city’s planning bureau Tuesday found that the day the new policy took effect, Feb. 1, there was a huge and abrupt slowdown in the number of apartments submitted for city review. In a typical year, private developers submit about 5,000 eligible homes for city review; in the six months since Feb. 1, it’s been just 466.

At first blush, that’s a problem. Portland’s population grows by 6,000 to 11,000 people each year. Since 2005, the number of jobs in the city has grown about 64 percent faster than the number of homes. The resulting housing shortage has allowed landowners to rapidly raise prices for many thousands of formerly lower-priced homes, creating an even more massive shortage of homes that are cheap enough for lower-income families to reasonably afford — and as a result, massive displacement of lower-income families.

A good inclusionary housing policy has the potential to reduce both of these shortages at once by putting new below-market-price homes on the market without reducing the number of total homes built. Since the private sector usually adds about 5,000 new homes per year in a growing economy, a well-balanced inclusionary housing policy could be creating 500 to 1,000 new price-capped homes every year, set aside for households making 60 to 80 percent of the regional median income for their family size.

Because only 466 eligible homes have been submitted for city review since Feb. 1, the number of price-capped homes for those first six months is only 60.

It’s probably too soon to know if we could do better

Do those low numbers mean the new mandate is malfunctioning? In its report, the city argues that it’s too soon to say … and it makes a pretty good case.

1. Most importantly, the unusually large backlog of homes submitted to beat the Feb. 1 deadline — 5,000 in December and January alone — created a bulge in the city’s “pipeline” of new homes that could potentially be built under the old rules: 19,000 proposed homes, theoretically enough for three to four years of growth. It’s likely that this backlog has spooked builders, who lose money if they bring homes on the market during a glut. As that bulge recedes, more builders may bite the bullet, learn the new rules, and discover that it’s still possible to build profitably. Only more time will tell.
2. At least a few builders do think they can make projects work under the new rules, even in the face of a possible glut. As we reported in February, a few private buildings eligible for the old rules have voluntarily opted into the inclusionary housing program. A few others have been freshly submitted, city economist Tyler Bump said in an email Tuesday, bringing the total to six. Those six buildings are where the 466 new homes (including 60 price-capped homes) are coming from.
3. Builders continue to work on a few potential plans, too: as of Feb. 1, the city has received 11 “early assistance” requests for developers to have open-ended conversations with city regulators about how to make “inclusionary housing” projects work. That’s far from a guarantee of building — many early assistance meetings go nowhere — but it’s a sign that builders still see potential. “Two are in the Central City and nine are outside the Central City, mostly in the inner neighborhoods, but a little further from the Central City,” the city said in its report.
4. Because the city rule exempts projects from the new mandate if they include fewer than 20 homes, some predicted a surge of 19-unit buildings. That hasn’t happened, at least not yet. From Feb. 1 to Aug. 1, the city took in 10 applications for 15–to-19-unit buildings, basically in line with past trends. However, if this were going to change, it would make sense if it took a year or two to appear. That’s because it’d depend on landowners realizing that their land isn’t as buildable as it used to be, and demanding less cash for it. Six months may be too soon for this to happen.

At the end of its report, the city promises another update on Feb. 1, 2018.

So, what can Portlanders conclude about their new affordability program?

Photo: drburtoni.

There are multiple ways to parse this, but I’ve got four takeaways for fellow housing affordability advocates:

1. Despite these low numbers, it’s probably too soon to know for certain whether or not the policy will soon start churning out below-market-rate homes quickly. As I said, the city makes a pretty good case that we don’t know yet.
2. It seems reasonable to conclude that the current program doesn’t oversubsidize development. If it did, more builders would be opting into it in order to pocket the extra profits.
3. The current housing backlog creates an opportunity to test tweaks to the program. The next year or so is a one-time chance to temporarily rebalance the program and see what happens. If lots of builders with old “pipeline projects” were take advantage of that rebalancing by opting in to the affordability program, the public would know its incentives had gone too far and could safely be scaled back.
4. Reducing demand for parking seems to be crucial to the program. One of the last-minute tweaks to the city’s incentive package was to lower auto parking requirements for projects that include below-market-rate homes. According to the city, four of the program’s six new buildings are taking advantage of that. The catch: This incentive is useful only if enough people are willing to pay full price to live in a building without on-site parking. This means that when fewer people demand on-site parking — fewer residents and, just as importantly, fewer real estate investors and lenders — more below-market-rate homes get built.

As I wrote last December, Portland’s inclusionary housing mandate is one of the most ambitious in the country, and that’s exciting. If it comes out well balanced (like the one in Montgomery County, Maryland), it has the potential to create thousands of new below-market-rate homes and make every big apartment project a win-win for affordability. Affordability advocates of every stripe should be keeping that shared goal in their sights.

Portland for Everyone supports abundant, diverse, affordable housing. This is a reported blog about how to get more of those things. You can follow it on Twitter and Facebook or get new posts by email a few times each month.