Portland Real Estate Market Still Adjusting to Inclusionary Housing

(AP Photo/Don Ryan)

Stephanie Reyes analyzed 1,379 policies and programs last year, all dedicated to inclusionary housing, the mandatory or voluntary inclusion of affordable housing units as part of market-rate or luxury developments.

One of the insights she came to realize: it’s important for cities to provide certainty in the market about whatever policies they choose to adopt. If developers think they can wait out a policy that the city might change its mind about, they’ll try to. Inclusionary housing policies need to be seen as a permanent part of the regulatory environment before they can work, she says.

So what does it mean when Portland appears now to be doubling-back on the inclusionary housing policy it adopted a year ago? Were the critics correct who said the policy would backfire?

“I can say with a huge amount of certainty that the answer is: We can’t know yet,” says Reyes, state and local policy manager for the Grounded Solutions Network.

When Portland voted to enact a mandatory inclusionary zoning policy late in 2016 — requiring some developers to set aside 20 percent of new apartment units for families earning less than 80 percent of median income — it was coming off half a decade of growth in multifamily construction. According to a report in The Oregonian, the city permitted an average of 3,200 apartments a year over the five years from from 2012 to 2016. In 2017, the number of permitted units shot up to 6,250, according to the report. But in the year after the inclusionary housing policy took effect, developers sought permits for only 12 projects that met its 20-unit threshold, totaling just 654 units.

“Before we enacted inclusionary zoning in 2016, a mad rush of developers and property owners and architects pulled out an enormous amount of permits—a historic number,” says Brendan Finn, chief of staff to Portland Housing Commissioner Dan Saltzman. “We obviously were informed of what was happening, and kind of referred to it as the pre-inclusionary zoning pipeline.”

But while the number of multifamily permits has fallen dramatically in the last year, many developers have yet to move forward on projects that were permitted before the inclusionary zoning policy was enacted. So last month, the city council voted to reactivate its old incentive program for projects that were permitted under the former regulations, in an attempt to both kickstart those developments and squeeze a measure of affordability out of them. The program, called MULTE, offers tax breaks for multifamily projects that set aside 20 percent of units for reduced-rate rents. The incentive will only be offered for projects permitted in the run-up to February of last year, when the inclusionary zoning policy took effect.

Finn says Portland is not abandoning its inclusionary zoning policy. The city is offering MULTE for certain earlier projects because it wants to keep encouraging a growth in housing supply. It might make changes to the inclusionary zoning policy as it gathers more data on the impact it’s having on the real estate market, but the policy is here to stay.

Reyes says that every city that’s considering mandatory inclusionary zoning needs to find a balance that promotes affordable housing without preventing growth in the market-rate housing supply. In Portland’s case, the past year’s drop in permits might be dramatic, but it’s not necessarily evidence that the inclusionary policy as a concept is hurting the market.

“The question in Portland is, did they find that line correctly?” Reyes says.

There’s no question that the advent of the inclusionary zoning policy caused the rush to pull permits, both Reyes and Finn say. Developers would naturally want to avoid any such regulations if they could. But the fact that so many projects were permitted in such a short time is probably contributing to the current slowdown in the market, along with increases in construction costs and other variables.

Reyes highlights the distinction between those who own property and those who build on it.

“Over time, what studies have shown throughout the years, is that generally, the cost of providing the affordable units ends up getting passed back to the landowner in the form of reduced land prices,” Reyes says.

Landowners can’t simply take their business elsewhere the way that developers can. So ultimately land costs need to adjust so that developers can still make their financing work, Reyes says.

“It’s confusing,” Reyes says. “It’s this new thing. It takes time for landowners to face up to the new reality.”

Finn says that despite the slowdown, and the city’s effort to overcome it, those adjustments are starting to happen.

“[Inclusionary housing] is already part of the nomenclature of the development community,” Finn says. “It’s already there. It’s already built into the pro formas. We still have a lot of cranes in the air.”

The city may adjust the incentives that are included in the program or make other changes to the policy based on market studies, to make sure the requirements are balanced. But Finn believes that Portland officials are in it for the long haul, and in fact are braced for a much bigger slowdown in the market. Construction and land costs, housing supply, and policy changes could all be affecting the local market in Portland. But the national economy is bound to take a downturn sooner or later, Finn says, and when it hits the Portland development market, some people are going to blame inclusionary housing.

“There’s a firm belief amongst Portland City Council members that that’s going to happen …” Finn says. “I think the council is pretty solid in the fact that they’re not going to be pressured to change the policy because of what’s happening on a national scale.”

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