With several HALA provisions still up in the air and rents still spiking, the battle for affordable housing is urgent as ever. Mandatory inclusionary zoning (MIZ) is expected to go online next year and together with the commercial linkage fee create 6,000 rent-restricted units in a decade’s time. Some lobbyists like Roger Valdez are still fighting to stop MIZ and he and some national pundits are skeptical MIZ will do much good. The skeptics’ argument hinges on the assertion MIZ would hinder housing production. The empirical evidence does not support that assertion; robust market-rate housing production and MIZ are not mutually exclusive.

The Urbanist did a deep-diving analysis last year in a piece called Why Urbanists Must Support Linkage Fees and Inclusionary Zoning: A Scalable Policy For Affordable Neighborhoods. Owen Pickford wrote:

There are five academic studies examining empirical evidence about the impact of inclusionary zoning on market rate housing production. Out of these five studies, only one found a relevant negative impact. That study, published by the libertarian think tank Reason, failed to acknowledge larger market forces, drastically oversimplified its models, and could be reasonably accused of intentionally misleading its audience. You can read a criticism of the study here.

The other four studies found inconsequential or no impact on market-rate housing production.

Meanwhile, one urbanist blogger we hold in high esteem, Daniel Kay Hertz (with City Observatory), has been vocal that inclusionary zoning is misguided. In an article titled Inclusionary Zoning Has A Scale Problem, Hertz wrote, “The point is not that inclusionary zoning is the enemy of affordable housing. It’s that it’s not that great a friend.” Recently Hertz extended an olive branch by praising a Shelterforce article by inclusionary zoning expert Rick Jacobus. The part Hertz liked was how strongly Jacobus emphasized the need to build more housing. Perhaps that was surprising, but, like Jacobus, we at The Urbanist support both MIZ and building tons of market-rate housing in Seattle.

If built under mandatory inclusionary zoning, a luxury apartment project like this one at 3627 Stone Way N could have been taller and included 5% of its units at 60% of AMI.
If built under mandatory inclusionary zoning, this four-story upscale apartment project going up at 3627 Stone Way N could have been built taller and included 5% of its units at 60% of area median income.

Jacobus criticized relying too heavily on market forces such as filtering to provide very low-income housing but acknowledged we have good reason to believe it can help people in the moderate-income range:

Now, filtering is not quite the panacea that some wish it were because once rents on older housing units fall below the operating costs, it is cheaper for property owners to abandon their buildings than rent them out. This creates a functional rent floor below which rents won’t fall no matter how much we build; but in high-cost regions the bottom of the housing market (the lowest rents typically available) is far above this floor. And to reach that floor we would need to build at such an enormous scale that it is hardly worth discussing. So building more won’t end homelessness or eliminate the need for affordable housing subsidies for very low-income households, but for everyone else struggling to pay rising rents, there is solid evidence that building even high-end housing will bring rents and housing prices down. Even if we can’t hope to build enough, some building is better than no building.

So, we have agreement that market-rate housing is a crucial part of the puzzle, but let’s not oversell what the market can do in a very high-demand city. We are talking about slowing rent increases, not seeing actual rent decreases, but the language overzealous advocates use can give the impressions of dropping rents. In January Hertz wrote:

[R]ents in Seattle, Denver, and Washington, DC appear to be easing significantly. In what a local business paper describes as an “alarming deterioration”—though renters probably have different words for it—the average Seattle rent fell by $59 in the last quarter of 2015, following a long period of rapid increases. Not coincidentally, vacancies also increased by a full percentage point. The Puget Sound Business Journal reports that landlords have reason to worry that things aren’t going to get any “better” for them: another 21,600 units of housing under construction should hold down rent growth into the coming year, too.

Hertz misrepresented the report which in fact showed rents fell only in the highest-end sub-markets, while continuing to climb overall. The prediction for the coming year also proved wrong in a few short months, as recent reports showed rents still steadily climbing. Nonetheless, City Observatory‘s other writer Joe Cortright was still citing Hertz’s original misinterpretation of the Seattle housing market data this month despite it being wrong at the time and even more wrong now. While building tons of supply is great, it seems the short term result we should expect is lower rent hikes, not lower rents.

We shouldn’t be leading tenants to believe their rents will go down from market-rate housing when evidence only shows their rents might not increase as rapidly. This is different than real rent decreases. In the long-term, filtering should work some magic, allowing market-rate units to serve more of the moderate-income market. But, as Jacobus pointed out, units will never filter all the way down into very low-income markets. It is true, though, that robust housing supply can lower the amount of subsidy the government needs to provide but no one really knows what the lowest income levels are that can be effectively served by the private market in large cities.

While praising Jacobus for a nuanced argument, Hertz couldn’t help but stereotype inclusionary zoning advocates and exhibiting little nuance on the subject:

And at the local level, the focus on inclusionary zoning and impact fees has both fed on and promoted the fantasy that all we need to do to solve the affordable housing crisis is squeeze developers hard enough. In reality, only a broadly-funded commitment to funding housing assistance has any shot at reaching the required scale. And even that won’t have the needed effect unless we build enough market-rate housing to get prices down and reduce the per-unit cost of subsidies.

Seattle’s MIZ program isn’t about squeezing developers since its paired with beneficial upzones. That helps explains why many developers signed on to the program as part of the Grand Bargain. We should feed on neither anti-developer fantasies nor free-market fantasies as we seek a political path to housing solutions both immediate and long-term. Hertz’s preferred solutions — such as reforming the tax code — require massive changes at the federal level. That’s just not something we’ve seen in a long time. We’d love to see a more progressive, affordable-housing-friendly tax code, but we must forge ahead with local level solutions, too. Plus, he is still working off the assumption that MIZ is going to hamper housing production and again that is a supposition not borne out by a closer look at the evidence.

An illustration of how some of the HALA recommendations would shape neighborhoods. (City of Seattle)
In this HALA illustration, the red top floor on the leftmost buildings represents the density bonus gained through the MIZ program. (City of Seattle)

To focus on our local example, I don’t think the HALA committee or housing advocates are saying MIZ will solve the affordable housing crisis. Seattle’s existing optional inclusionary zoning program has only averaged about 50 units per year since 2001 when it was implemented. Making the program mandatory in the midst of Seattle’s building boom should boost the rate of production, but admittedly it’s a modest solution to a huge problem that will require multiple solutions. On the other hand, MIZ has the potential to create a coalition that pursues increased densities in order to produce more affordable housing. It also helps ensure income integration, a huge sociological benefit at a time when cities are increasingly segregated by income level. The question is, are the negative effects of MIZ certain? And if so, are they significant enough to pass up these sociological benefits, the political benefits, and the ability to creating hundreds of affordable units per year without raising new city revenue?

Hertz linked inclusionary zoning to anti-developer extremism, but I don’t think that’s how Seattle’s existing (non-mandatory) inclusionary zoning program has worked, and it’s not how the planned MIZ program will work. Heck, even The Seattle Times, normally a very pro-business paper, endorsed the approach. Seattle’s MIZ program is not designed to fleece developers, just to get them to make a modest investment in affordable housing. And crucially, some of MIZ’s cost will be born by landowners not by developers or by market-rate renters. By lowering slightly how much developers are willing to bid on land, the program will capturing some of spiking land value that landowners are exploiting to huge windfalls. The requirement is low: only 5% to 7% of new units need to be affordable or developers can pay an in-lieu fee. In exchange, developers benefit from a density bonus. Developers aren’t being asked to do the impossible and the overarching guiding principle of HALA is still: we need a big building boom.

If the next 100,000 multi-family units in Seattle are built under MIZ, Seattle will benefit from 5,000 to 7,000 affordable units with rents restricted below 60% of AMI for 50 years in the most amenity-rich neighborhoods without costing taxpayer dollars. We agree with Hertz. Cities, states and the federal government need to pursue more ambitious housing policies. Many of us strongly support his biggest proposal, a bigger capital gains tax on real estate. But that doesn’t preclude MIZ. Mandatory inclusionary zoning may not be a gamechanger given the scope of the housing shortage, but it’s nothing to scoff at either.

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14 COMMENTS

  1. “We should feed on neither anti-developer fantasies nor free-market
    fantasies as we seek a political path to housing solutions both
    immediate and long-term.”

    This is much too reasonable. More yelling and dogma plz

  2. Tying MIZ to upzones and claiming they’ll help is like tying your Schwinn to a Maserati and saying how fast it is. I think we can all agree that upzones are what will really helps rents, and can even break your *building doesn’t lower rents* model. If you’re arguing that we’ll only get upzones by including MIZ for political reasons, I’m open to that argument. But trying to claim MIZ will work because it’s tied to an upzone isn’t a great argument in support of MIZ.

    And more on the *building doesn’t lower rents* argument. In absence of an upzone I completely agree. Builders build in reaction to rents (or predicted rents). If it currently costs $X to build a unit and the present value benefit (from rent or sales) of building a unit is the same $X, new units won’t be built until rents go up. But if you drop* property values by upzoning, suddenly the costs per unit drop without effecting the present value benefit of building that unit. This adds units without needing to wait for rents to go up, and could lead to rents actually dropping.

    * this is where I’ve seen some miss the point. but upzoning increases property values, right? Perhaps for specific properties, but city-wide you end up with more buildable square footage (supply), without affecting the demand. This drops property values overall.

    • Upzones definitely help, yes we all agree.

      In situations that MIZ comes out of land costs, MIZ should actually increase the production of housing and provide subsidized housing. In fact, some research has shown a correlation between upticks in overall supply with MIZ. My observation has been that a lot of people think the MIZ policy can stand on its own without upzones although they may be a key part of getting it implemented.

      Politics make MIZ with upzones a real clear winner, especially in Seattle. I read Doug’s article as pushing back a little on the criticisms of MIZ. I think Daniel is supportive of MIZ under the right circumstances although he has criticisms. Overall the message I’ve gotten from City Observatory is that it’s not an ideal tool and there are better tools if politics will allow them.

      This is a fair criticism of MIZ but a lot of people also believe a well implemented program is not a second class tool, but rather a central tool for creating a successful housing market. I fall into this latter camp and I’m wary of criticisms of MIZ, especially in Seattle right now. The policy solves problems that other policies don’t address.

    • I don’t get it. Upzoning increases values for “specific parcels,” but total those specific parcels citywide and it “drops property values overall”?

      • I’ll step you through it. Imagine if tomorrow we upzoned every single family property to LR1 (shortest of lowrise multifamily, just to pick an example). What would happen to LR1 property values? They’d all shoot downward of course – they’d go from the artificial scarcity of limiting only 2.3% of our land area to this type to being able to build multifamily everywhere. Suddenly the few LR1 properties that are suitable for building become just a few of many, and rather than developers bidding for those spots (and owners sitting on them until they feel the market is hungry enough), you get projects penciling out all over the city.

        Now scale that down to just another 2.3% of our land area. The specific lots increase in value (there’s more potential value in building multifamily compared to single family, so prices will surely raise some). And the specific lots that were already LR1 drop. But what happens to the lots that were LR2? They drop too, as some of their future demand will be absorbed by future construction on these new LR1 lots. Same with LR3, and more or less every property in the city.

        Another way to demonstrate this is to look at the city overall. If you increase the number of units that can be built, then you have less scarcity of buildable capacity for developers to bid on. I could explain more, but I’ll just use the short hand: supply and demand.

        • Just as I thought. No numbers, only speculation. And based on a scenario that can’t happen (upzone all SF property to MF). What’s in your Kool-aid anyway?

          • RDPence,

            Are you saying you *don’t* think the current value of LR1-zoned land would decline if all SF zones were immediately converted to LR1? That seems utterly insane to me. Can you sketch an account of why you think that wouldn’t happen?

          • I think rezoning single family zones to a more broadly encompassing low rise multifamily zone stands on its own merits. It’s a great idea. Would it cause a significant drop in land prices? My intuition is that for specific supercharged markets if enough suitable developable land in the same market was provided then yes it might drop prices for LR in that specific neighborhood. (Ballard for example)

            On the other hand, in SF neighborhoods the value of the land isn’t necessarily based on re-development value at this point since current zoning wouldn’t provide many options. Plus, outlying neighborhoods don’t necessarily have a brand yet that developers can exploit nor the same amenities as the closer in neighborhoods that are really hot right now. So I don’t think that the value of SF properties is going to decrease below where it’s already at, which is already pretty high, because there will still be a strong market for SF houses.

            On the other other hand we are a city that likely will grow by more than 100,000 residents in the next decade if current trends hold. Even if the zoning is friendly, we are going to have to continue to build at a furious pace to keep up. It’s possible we upzone a lot of land and what we often see is a softening of land price increases rather than outright drops because the demand is so high.

          • What I’m sure will not happen is the rezone of all SF real estate to LR1, or any other MF zone. Ain’t gonna happen, so I’m not spending any time trying to spin out scenarios based on that.

            The original Grand Bargain in Seattle is the urban village model. Put most of our MF land in compact and walkable areas, where residents have good local access to stores, restaurants and, most importantly, great public transit. If those urban villages don’t offer enough MF zoning, then create more villages, or expand the ones we have (already in the works, btw). It doesn’t make sense to speculate about putting more MF development in non-walkable neighborhoods (no sidewalks!) or where local public transit runs only every 30 minutes.

          • “I’m sure will not happen is the rezone of all SF real estate to LR1, or any other MF zone. Ain’t gonna happen, so I’m not spending any time trying to spin out scenarios based on that.”

            No one is claiming it’s going to happen. This is completely non-responsive. In an alternative universe where politics were such that it could and did happen, what do would happen to current scarce LR1 land value?

            The point is a simple one. Buildable LR1 land is valuable because it’s been made artificially scarce. If it were considerably less scarce it wouldn’t hold as much value as it does now. Since you’ve basically conceded this

            The rest of the comment is just your standard retreat to your core talking points, which is your ‘tell’ that you’ve got no response to the specific question posed to you. As always, it reads like a message from some alternative universe where there’s no housing shortage or affordability crisis, because you can’t or won’t allow any consideration of the possibility that the glorious compromise of the 90’s you love so dearly may actually have some unsavory consequences.

          • Sounds like you want to argue that Urban Villages are no longer appropriate, that we should just let MF development sprawl across the city, regardless of plans, or consequences. I can’t go there. For reasons stated. I still think walkable urban communities are a Good Thing. Allowing MF everywhere works contra.

  3. Hi! I responded a bit on Twitter, but I thought I would add just a bit here.

    First, I love The Urbanist! You guys do great work and are clearly a leading local urbanist blogs in the country.

    But I think this is a pretty weird interpretation of my work. The pieces we wrote about the effects of building more have, in fact, indicated that the near-term effect is a slight decline or flattening of prices, not a crash. In other pieces, we’ve focused on filtering—and been quite explicit, including graphs, about its timeline.

    We also say, in most of our pieces about the importance of building more housing, that the market won’t solve the problem on its own. That’s why we’ve repeatedly called for dramatically expanding direct housing assistance to low-income households, far beyond what MIZ would do in Seattle. It’s true that those ideas are, for the moment, far away from being implemented! But it’s weird to link to someone arguing for a new $40 billion public entitlement and then warn about “feeding on free-market fantasies.”

    I also don’t think it’s justifiable to say that I “equated inclusionary zoning with anti-developer extremism.” I pointed out that IZ has not created that many affordable units compared to the need, that its structure makes it really hard for that to change, and that therefore focusing on IZ as the centerpiece of affordable housing policy is misguided. This, which I wrote in the piece you linked to, sums up the position: “In short, IZ needs to be reframed as not a centerpiece, but a minor part of an affordable housing agenda that actually serves everyone who needs help.”

    In any case, I’m looking forward to reading more from The Urbanist. Thanks!

    – Daniel

    • Thanks for correcting me where I strayed. I didn’t intend to broadly paint you as feeding on free-market fantasies. Obviously supporting a $40 billion dollar welfare program is not that. Spinning the Seattle rent data at the end of last year as relief is what seemed like fantasy to me.

    • And I think you’re right about my saying you “equated inclusionary zoning with anti-developer extremism” so I changed it to “linked inclusionary zoning to anti-developer extremism.”

      Centerpierce or side piece we think it’s good policy. Big structural policy will take time, and we need more immediate solutions, too. The Washington state government caps the real estates capital excise tax and makes an income tax illegal so the city of Seattle is handcuffed in that regard.

      I also want point out that your partner at City Observatory presents probably a more fervent case against IZ than you do saying:

      1. Inclusionary zoning increases market prices.
      2. Inclusionary zoning creates only token numbers of affordable units.
      3. Inclusionary zoning requirements would encourage further sprawl.

      The first point and third points are based more on theory than evidence (or at least the evidence wasn’t provided). If it were true than IZ increases market prices, it’s also a matter of degree: do market prices go up a lot or just a tiny bit? And as to the “token” units that’s a matter of perspective I guess. Montgomery County, Maryland produced 14,000+ rent-restricted units with IZ. That’s a larger portfolio than some mid-sized cities have in their public housing programs. Obviously non-mandatory IZ programs don’t produce as many units but then the scale of any negative effects should also be lesser in that case.

      http://cityobservatory.org/bursting-portlands-urban-growth-boundary-wont-make-housing-more-affordable/

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