PORTLAND, Ore. (PORTLAND TRIBUNE) — After a stall in permit applications following the passage of the inclusionary housing policy that went into effect Feb. 1, April finally saw a few developments with more than 20 units cautiously being thought out.
The Inclusionary Housing Zoning Code project is a collaborative effort between the Bureau of Planning and Sustainability and the Portland Housing Bureau that requires all new developments with more than 20 units to include a ratio of affordable housing, with options and incentives.
Before the inclusionary zoning policy went into effect, developers ramped up permits submitted directly, saying they didn’t think it would pencil out for them. However, the City has hope the slowdown is temporary.
A valuation of at least $270 million worth of new developments in the city could be eliminated by the Inclusionary Housing zoning code project, based on the city’s public document project permits from last year.
However, city staff at the Portland Housing Bureau say a number of other factors are contributing to the slowdown, and they want to focus on creating new units for the housing crisis with developments already approved and in the pipeline by asking them to opt in to inclusionary zoning.
City says: opt in
“As a practical matter, we at PHB and the Mayor would like to see as many as possible of the vested projects to convert to voluntary inclusionary housing projects as possible by offering some property tax inducements,” said Kurt Creager. “What this means is while many developers sought to vest their projects prior to the imposition of mandatory inclusionary housing requirements, they did so at the top of the market when rent growth was already slowing and interest rates were already moving upwards. In short, and I need to stress the market was already slowing down which means other factors at work are to be attributed, not Inclusionary Housing per se.”
Creager, director of the Portland Housing Bureau, told the Business Tribune some of those other factors include labor, materials and increasing interest rates.
“The other factors: interest rates of course are ticking up, projects that may have been structured to work at interest rates of last year are going to have to account for higher costs of money — Canadian timber tariffs are going to start driving material costs higher — and labor costs have been high the last years anyway,” Creager said. “Contractors are all busy, they’re willing to take on new work, but do so at a premium.”
Dory Van Bockel, housing program coordinator with the Portland Housing Bureau, told the Business Tribune they’re in the process of kicking off a new voluntary opt-in to inclusionary housing.
“The market condition in general — what happened is that trend that was already happening or moving forward got compressed because of that timeline of the inclusionary zoning coming up,” Van Bockel said. “We anticipated that would happen. It’s very possible after developers just get a little more grasp on what the impacts are that they might still continue to move forward.”
With the boom of projects submitted in January before the inclusionary housing policy went into effect, the city intends to focus on those projects already in the pipeline.
“Essentially, we’re exploring using the existing multi-program, with multi-limited tax exemption. We’re possibly expanding how it had been limited with the new inclusionary zoning in order to offer full exemption across the city to projects that are not subject to the inclusionary zoning based on permits already being vested, allowing them to voluntarily opt in to the inclusionary zoning requirement and receiving additional incentives,” Van Bockel said. “The way the inclusionary zoning program was calibrated outside of the Central City plan district and Gateway plan district, the tax exemption will only be applying to projects as an incentive on the affordable units. With this voluntary opt-in program we’re exploring expanding the exemption to the whole project.”
Creager pointed out people with construction loans can’t discount their rents below their costs.
“We think that pipeline of vested projects is where we should focus our attention. A lot of effort went into developers engaging their architects and engineers to proffer their site plans, but they’re not completed designs, they’re conceptual,” Creager said. “It serves the city’s interest to convert as many of those as possible to final built projects. Owners already have site control, already have vested money in the project. That’s the most appropriate area to focus our energies.”
In 2016, at least 41 residential project with more than 20 units were approved for permit, with a combined estimated value of least a total of $272.2 million.
Some projects did not have the number of units listed. The Business Tribune did not include these numbers in the count, so it is likely a low-ball number.
Permits submitted after the Feb. 1 deadline are subject to the new inclusionary housing policy, requiring a percentage of units in developments with more than 20 to be affordable rates.
Since Inclusionary Housing went into effect Feb. 1, the Housing Bureau has seen five permits come in that are subject to it. One of those is a for-profit development and four are for projects being developed with Portland Housing Bureau assistance.
“And we’ve been attending early assistance meetings and pre-application conferences and have talked to many other developers who are still exploring moving forward with permitting with the inclusionary zoning in place,” Van Bockel said.
January saw 20 permit applications for developments with more than 20 units, with a total valuation of $74.7 million, before it took effect.
In February, just one was submitted for permit, a 128-unit apartment development valued at $7.7 million owned by KOZ Development.
In March, there was one permit submitted for a 101 unit development at 7120 S.E. Foster Rd. — a city-owned project valued at $10.4 million.
In April, the ramp-up included four permits submitted for developments with more than 20 units.
“I know people are exploring the different incentives to see if those hold enough value that it’s worthwhile to move forward,” Van Bockel said. “There are also unknowns in the market: changes in zoning code that will still happen because of the comprehensive plan and different things outside inclusionary zoning that add to different factors to all the things that need to line up for a project to move forward.”
But nobody has yet formally applied to opt in to inclusionary zoning, although there has been verbal interest.
“We have had conversations with people primarily based on them exploring additional FAR (floor area ratio) bonus or parking exemptions that they wouldn’t have received otherwise,” Van Bockel said.
Creager said they’ve been briefed by a private development associate LOCUS, an affiliate of Smart Growth America, which is a group of affiliated developers based in Portland and Vancouver.
It released a study on the market recently, which Creager is using to develop further incentives.
“They suggest several things. A few of them we can accomplish rather quickly,” Creager said. “One is by recalibrating the property tax offset. With consent of the City Council, we could adjust the amount of tax abatement that goes to projects in the mixed-use corridors. At the present time, the tax abatement only applies to the affordable units.”
The ratio of affordable units — 20 at 80 percent of the median family income, or 10 units for families who generate lower than 60 percent — has always been a choice under inclusionary zoning, but now projects that were permitted before the policy went into effect will be able to opt-in and participate voluntarily.
“There might be some interest in that. We talked with the Mayor about doing it — we have to do some rulemaking to adjust the standards — in Title 30 by the city council, but it wouldn’t affect the zoning, it wouldn’t have to go through an elaborate hearing process with (the Bureau of) Planning and Sustainability, nor would it need to go to the state with approval like other zoning has to,” Creager said. “That appeal to the Mayor could be implemented fairly quickly.”
Creager said in a Housing Bureau data sweep, properties that went into service during 2016 had an average monthly rent for new units around $2,000.
“There is a peaking of the luxury market. That’s where the mainstream market has been for the last year or two, and that market according to CoStar is starting to show signs of being overbuilt,” Creager said. “There’s a softening of the market, which shows up in the number of months it takes to lease up a building and the amount of concessions. There’s effectively a 20 percent discount if you’re offering two months rent (free with signing a lease). That tells me the property tax abatement would be a useful hedge against people’s risk.”
Where it’s all headed
The Housing Bureau has two full-time staff at the permit center now as a development service at the Bureau of Development Services, as a supplement to the three staffers and a manager working on the inclusionary zoning program and the incentive programs that go alongside it — the system development charge exemption program and the tax exemption program.
“We have certainly heard from potential applicants within Central City who would already be getting the full exemption who still are interested in pursuing the multi program, in that case voluntarily making affordable housing available,” Van Bockel said. “Central City is already getting the full exemption.”
Urban Development Group, under principal Dennis Sackhoff, has three projects that they’re considering converting from currently exempt to voluntary. One was identified in Sellwood.
Also new, the Housing Bureau is now part of the permit review process.
“Procedurally, because we need to review new permits subjected to inclusionary zoning, we’re in line with other applicable bureaus to make sure the options that are being selected meet the requirements of the program,” Van Bockel said. “And also applying the incentives a project is eligible to get by providing the affordable units or paying a fee in lieu, or whatever option they choose.”
Van Bockel and her team are tracking the progress of the program, and plan to use statistics to back up the next decision.
“With the voluntary program there will be some work around figuring out the calibration of that, and then there would be a public process that we would do before making any formal changes to the guidelines to allow it to move forward,” Van Bockel said. “That would be the next steps: better analyzing what that would look like, send out notice for a 60-day period and hold a meeting with anyone able to come and comment on any propose changes to the administrative roles for the program to allow for that change.”
The Portland Tribune is a KOIN media partner.