Portland Inclusionary Housing Update

December 12, 2018
Authors: Jennifer Shuch, HFO Research Analyst
Publishers: HFO Apartment Investor Newsletter

City of Portland Inclusionary Housing

Article Updated December 11, 2018

Inclusionary Zoning (aka Inclusionary Housing)
In December 2016, the City of Portland approved a mandatory citywide Inclusionary Zoning (IZ) policy, which went into effect February 1st of this year. Many developers made sure to submit projects to the city prior to that deadline; January experienced a notable rush of permit requests.

The Program
Currently, Portland’s IZ program applies to all developments with 20 or more dwelling units. It requires 20% of units be set aside for households making less than 80% median family income ($65,120 for a family of four). Incentives offered by the city to offset the costs include a 10-year property tax exemption and CET exemption on affordable units, and a density bonus of 3.0 Floor Area Ratio. Developers can also choose to set aside 10% of a building’s units for families making 60% of median
 family income in exchange for additional incentives. College dorms, nursing homes, and similar group living facilities are exempt from the inclusionary zoning requirement if they have a shared kitchen facility.

Effects of Labor Shortage
When the IZ requirement went into effect, developers expressed concern that their projects would not pencil out despite the incentives offered by the city. A massive labor shortage in the construction industry has led to increased costs and expanded timelines for development projects. During the recession, many construction companies went out of business. By some estimates, there is a shortage of 10,000
construction related contractors in Oregon. Other factors adding to project costs are rising interest rates and Portland’s 1% construction excise tax, which went into effect in 2016. These factors raise the cost of apartment construction before the required subsidized units are factored in.

First Six Months
During the first six months of the program, there were zero applications for large market-rate apartment projects.

First 18 Months
The City of Portland produced an 18-month review of the project in September 2018.

BPS struck an optimistic note in their report, pointing out that the 19,000 units currently in the pipeline represent a four-year supply of new housing. They also note no increase in developers submitting 15- to19-unit projects for parcels that could support higher densities. Tyler Bump, the senior economic planner for BPS, said he will not worry about diminished supply unless the pipeline falls below 10,000 units. However, only 5,000 of the 19,000 units in the pipeline have received building permits. It is likely that not all the projects will be built, especially with a growing shortage of skilled construction labor. Material costs have also increased alongside the cost of labor, raising the possibility that some projects submitted before February will no longer be feasible if the city’s approval process takes longer than expected.

Behind the Scenes
The city now appears to realize that inclusionary zoning will not produce the anticipated affordable units. They are acutely aware that the 19,000 units vested prior to February would produce 3,000-4,000 affordable units if they were subject to IZ requirements. According to the Daily Journal of Commerce, the Housing Bureau is working on a program that would allow projects vested prior to IZ taking effect to apply for a 10-year property tax exemption in exchange for opting in 
to inclusionary housing. The program would be capped at $50 million over a 10-year period.

Barriers to Development of Affordable Housing
The construction of affordable units under Portland’s IZ program depends on the willingness of developers to build projects in the city. The city is reliant on private developers to invest in a market with substantial barriers that make construction projects costlier than they would be elsewhere. If developers begin to look less favorably on Portland, we will fail—not only in our goal of providing affordable units—but to provide any units at all. As in-migration trends remain strong, it will be wise for citizens and the City Council to continue examining the impact of this policy on multifamily construction in Portland and to remain involved.

Update: According to a City of Portland Housing Bureau summary posted December 4th, the IH program through October 2018 had resulted in a grand total of 318 rental units--none of which are yet complete. Of the 318 total units, 188 have construction permits and an additional 130 remain pending. The City's records do not show any of them having yet reached market