Warning From Portland: Mandatory Inclusionary Zoning Brings Building to Halt

I’ve often said that I’ve never seen such intense and stubborn support for such a significant and sweeping imposition as I have for Mandatory Inclusionary Zoning (MIZ). There are two opponents in Seattle to the measure that the City calls Mandatory Housing Affordability (MHA), Seattle For Growth and angry neighbors who have appealed the program because they oppose additional growth and housing. The importance of stopping the program’s implementation can be found in Portland who is a year or so ahead of Seattle with a similar program. Housing production there has ground to a halt.

A story in the Portland Mercury has a headline that should cause anyone in the Seattle housing discussion to pause: Portland’s Bet on Forcing Developers to Build Affordable Housing Is Getting Lackluster Results. I’ll just quote liberally from the story:

A year ago, Portland City Council enacted “Inclusionary Housing” (IH), a new policy requiring any apartment building of 20 units or more to rent a portion of them below market rates—from 30 to 80 percent of the city’s median family income, depending on the option a developer selects.

When the city implemented the policy, detractors warned the new rules would simply ensure developers stopped building here. City officials argued IH would force the private market to create much-needed affordable units in Portland’s building boom.

A year into the policy, the detractors seem to be winning. Apartment construction in Portland has fallen off a cliff, though there’s still ambiguity as to whether IH or other market forces are the key reason. Meanwhile, Mayor Ted Wheeler is planning to sweeten the deals that the city offers developers to convince them to build.

It is hard to know exactly what’s going on. When looking at any economy, it is often only after the fact that one can determine a cause and effect. But the speculation is that many developers rushed projects through the permitting process to avoid the new requirements. Now building of new housing in Portland has come to a standstill.

“We’ve seen the spigot turned off so completely, so fast,” says Kurt Schultz, a principal at SERA Architects, who notes that his clients who’ve worked with similar policies in other cities often blanch when told of Portland’s strict IH rules. “I’ve never seen it turned off so fast before, and I’ve been doing this for 30 years.”

The same thing could be happening in Seattle; lots of projects rushing to get vested before the imposition of the new scheme. Here’s what I said in a post at Capitol Hill Seattle discussion the apparent fall off of design review applications:

Roger Valdez of Seattle for Growth suggested that some builders may have been rushing their projects through the process in order to beat the implementation of those new regulations. Now, he thinks some may be waiting to see what the final rules will look like. Until a developer knows what the rules will be, it’s difficult to know what projects will be profitable.

Until more certainty returns, Valdez said, there may be a bit of a slowdown, but he suspects it will be temporary.

I think Seattle will likely see a locking up of the market as buyers and sellers try to understand whether land is more valuable or less valuable with the imposition of MIZ, and once projects are vested, investors will likely wait to see how things shake out. That means not much buying and selling of land and not much new building. But demand will keep up. This means that what most agree is a slow down in rent increases will also stop; halted supply and steady demand mean prices will pick up speed again.

And then when prices begin to surge, investors will feel better about investing in Seattle projects again. This is a bad thing. As I’ve said a million times, MIZ “works” because it is entirely dependent on prices to rise to rationalize the fees and requirements. This doesn’t help the “housing crisis” everyone says they’re worried about. The imposition of MIZ, and even just the threat of it, is already creating enough uncertainty in the market that people are holding back. This is a recipe for higher prices, and when the rise enough in Portland and here, building will begin again. But that doesn’t help the consumer, especially the one who has less money to spend on housing.

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