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Cities giving inclusionary zoning more muscle to battle lofty housing costs

June 12, 2017 | By

Most renters would agree that multifamily rents have been rising at a fairly steep pace over the past few years. Many municipalities are attempting to address this issue, in part, by strengthening their inclusionary zoning programs.

As noted in Fannie Mae’s Multifamily Market Commentary for April and this short accompanying video, the current imbalance between supply and demand is straining the rental market.

Nationally, apartment rents in the fourth quarter of 2016 were up an estimated 13 percent from their pre-recession peak in 2008. Over the same period, the vacancy rate fell from a high of 8.25 percent to 5.5 percent.

The affordable housing sector has acutely felt the impact of the tightening market. And there is less relief available from federal subsidies, which have been stagnant for some time. So local and state governmental agencies are relying more heavily on inclusionary zoning to build new affordable housing.

Beefing Up Inclusionary Zoning

Cities are targeting new residential properties – including multifamily. And they are beefing up inclusionary zoning programs already on the books or creating new ones. In some cases, the programs are even mandatory.

Municipalities use inclusionary zoning to give developers incentives to include affordable units in new, mostly market-rate properties. These incentives can include things like density bonuses, an expedited permitting process, fee waivers, or even relaxed development standards.

Some programs – such as one in Massachusetts – can also permit tax credits. That voluntary set-aside program has produced about 30,000 affordable housing units.

Inclusionary zoning can usually be found where there has been a lot of job growth, an influx of new residents, and a shortage of affordable multifamily rentals. Since inclusionary zoning programs do not require direct subsidy dollars to create affordable homes and rentals, they are considered an efficient, market-based solution for affordable housing.

Coastal cities like New York and San Francisco offer new and improved programs. There is inclusionary zoning in established places like Boston and Atlanta and popular metros such as Seattle and Portland, OR. It is even starting to crop up in Boulder, CO, Asheville, NC, and other fast-growing smaller cities.

Mixed Results

According to Grounded Solutions Network, a non-profit that provides technical assistance to municipalities implementing affordable housing programs, about 40 municipalities – primarily in the high-cost housing markets of California – now have programs that set aside 20 percent of building units as affordable housing. That may seem like a big number. However, to date these programs have not been a significant source of affordable housing in many places – in part because some programs are so new.

Such is the case with inclusionary zoning in Washington, D.C. Instead of units, its program sets aside a certain percentage of square footage. The program is mandatory and applies to new construction and substantial rehab projects that increase square footage by at least 50 percent. It generally gives the developer a density bonus of up to a 20 percent in exchange for setting aside 8-20 percent of a residential property’s square footage as affordable.

The District of Columbia’s affordability requirements vary by location. In some neighborhoods, the city may require half of new units to be affordable for households with incomes up to 50 percent of the area median income (AMI). The other half of the property must be affordable to families with no more than 80 percent of AMI. In other neighborhoods, all of the units must be affordable up to 80 percent of AMI.

Since it began in 2009, the program has produced an estimated 318 units of new affordable rental housing and 84 affordable units for sale. But that’s just a small percentage of the approximately 21,000 new multifamily units that have come onto the market in the meantime.

Setting More Aside

Other localities – such as New York City – are giving their inclusionary zoning efforts more muscle. In early 2016, the city added a Mandatory Inclusionary Housing program. It is notable for mandating setting aside a much higher percentage of affordable units than previous programs.

The program gives the planning commission and city council two basic options when they approve housing capacity through land use actions. They can impose one of those options, or both. Under one requirement, the developer must set aside one quarter of the units to be affordable up to 60 percent of AMI. That includes setting aside 10 percent of the units to be affordable for up to 40 percent.

Under the second option, developers can set aside just under one-third of the units for affordability up to 80 percent of AMI. The city can impose additional affordability requirements when it deems them necessary.

San Francisco provides another prime example of a city that has been beefing up its inclusionary zoning. In projects with at least 25 units developed on or after Jan. 12, 2016, developers must set aside 25 percent of the apartments as affordable. That’s up from just 12 percent in 2013.

We recently published an infographic on how the Big Apple, Los Angeles, and Seattle are applying inclusionary zoning to tackle affordability.

Inclusionary zoning is doing some good. We just don’t know exactly how much. One estimate is that this approach has yielded 150,000 affordable homes – including single-family and multifamily.

But until we have a public national data base to identify and keep track of the various programs across the country, the real impact of inclusionary zoning will remain unknown.

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae’s Multifamily Economics and Market Research Group (MRG) included in these materials should not be construed as indicating Fannie Mae’s business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the MRG bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the MRG represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

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