Under Commissioner Carmen Rubio, the newly realigned Community and Economic Development bureaus including Housing, Planning and Sustainability, Development Services, and Prosper Portland have undertaken a comprehensive series of housing production analyses over the past several months. The result of their work will be presented in a Council work session on Tuesday, July 25, and will lead to a set of recommendations to spur housing development in Portland.
The analyses conducted by these bureaus paint a fuller picture of Portland’s housing market and the challenges ahead as Portland moves to increase housing production. They include:
- A housing needs analysis that identifies what types of, and how much, housing Portland will need as the city continues to grow;
- A study of construction costs for housing that are contributing to unprecedented challenges in housing development, and how local regulations can further drive up the cost;
- A study of the City’s Inclusionary Housing program to ensure the program is functioning the way Council envisioned when it was created in 2016.
“This is a critical time in Portland’s housing landscape,” said Commissioner Rubio. “While inflation and high interest rates have created real impediments to building more housing in Portland at the rate we need, it is the City’s job to rise to that challenge and continue to take actions on the things we do control that can bring greater predictability and stability to the housing production ecosystem.”
Portland’s Housing Needs
The Bureau of Planning and Sustainability (BPS) is currently updating the state-mandated Housing Needs Analysis (HNA), which identified the need for approximately 120,000 more housing units at a variety of income levels in Portland over the next 20 years. The analysis also shows the need for more family-size, age-friendly, and accessible homes as well as more opportunities for home ownership. BPS will bring the proposed draft of the HNA to Council for final adoption by the end of 2023.
Project Feasibility Challenges
At a time when we need to step up housing production, many cities across the nation, including Portland, are facing unprecedented challenges in housing development. Initial findings from a construction-cost study, which was conducted by BAE Urban Economics in coordination with the Portland Housing Bureau, show that construction costs have risen more than 50% since 2016. It also shows that significant external market forces are hindering housing development in the post-COVID era: Rising inflation, interest rates, wages, materials, and supply-chain issues are driving up the costs of development in Portland and across the country. In comparison to peer cities, Portland has fewer renters overall and a larger share of lower-income renters. This means that developers in peer cities facing rising costs can compensate with higher asking rents, whereas development in Portland is currently less feasible.
While it may take several years for the larger market forces to begin to shift, the City is examining various City policies and regulations for possible adjustments that can help mitigate any additional burdens on development feasibility. In February 2023, the Bureau of Development Services (BDS) conducted a survey of developers to identify several code requirements, such as those for bicycle parking, public infrastructure, and the timing of payments for System Development Charges (SDCs), that have a significant impact on the production of needed housing units.
In response to these findings, City Council adopted an ordinance in April 2023 deferring SDC payments for up to 24 months on all new housing units. City Council also approved limited SDC exemptions for office-to-residential conversions requiring seismic upgrades and froze all SDCs through June 2024.
“We’ve heard from developers that reducing carrying costs, especially on larger multi-family housing projects, can be immensely helpful in making the construction of new housing units more feasible,” said BDS Director Rebecca Esau. “Helping to offset some of the costs of needed seismic upgrades can also reduce some of the challenges in converting underused office buildings to serve our housing needs.”
Building off the BDS survey, another study currently under way is analyzing how individual City requirements contribute to rising construction costs. Initial findings from BAE Urban Economics suggest that a handful of local regulations can increase the cost to build housing in Portland by as much as $60,000 per unit. A finalized full report from BAE is expected next month.
Inclusionary Housing Calibration Study
With the support of a consultant, BAE Urban Economics, and a work group of external stakeholders in the housing and development industry, PHB recently completed a study of the City’s mandatory Inclusionary Housing (IH) policy. IH policies exist around the country and were created to produce affordable housing in the private market where it would not otherwise exist. IH policies also combat racial and economic segregation by creating mixed-income buildings and neighborhoods within desirable, amenity-rich areas.
Portland’s IH program went into effect in February 2017, mandating that residential developments creating 20 or more new units include a percentage of those units at affordable rents. In exchange for the affordability requirements, the City provides developers with a suite of incentives to offset the reduced rental revenue from those units, such as SDC and Affordable Housing Construction Excise Tax (AHCET) exemptions, and a 10-year property-tax exemption. Since going into effect, the program is responsible for 1,144 affordable units, open or in development, in private-market projects where affordable housing would not otherwise exist.
With the adoption of IH, PHB committed to periodic reviews of the program to make any necessary adjustments. While the initial focus of this work was to calibrate the elements of the program not previously calibrated, including options related to home ownership development and offsite construction, a key question that arose more recently is how the program relates to current challenges in overall development feasibility.
In late 2022, PHB convened an external stakeholder work group of 10 development and housing professionals representing the private, public, and community-development sectors to review the analysis and findings from the calibration study and to recommend potential changes to the program.
Key findings from the IH calibration study show:
- The City’s current incentives are effectively offsetting the impact of the affordability requirements under IH on projects in the Central City, but less so in the higher-rent submarkets outside the Central City such as Slabtown and the inner Eastside commercial corridors. This is primarily due to the 10-year property tax exemption, which is available for all residential units in a building in the Central City and provides significant financial value, but only applies to the affordable units outside the Central City.
- Other potential changes to balance the program in high-cost areas, such as reducing the number of affordable units required or offering deeper development bonuses, were also studied but were found to have minimal effect.
- Though much more modest than the incentives available in the Central City, the City’s incentives in Portland’s lower-rent areas such as East Portland are more than adequately offsetting the impact of the affordability requirements. However, development in those areas still faces considerable challenges due to high development costs.
- Even with a balanced IH program, development is still not feasible in most areas in Portland due to the broader feasibility challenges outlined above.
- The only way affordable housing units required under the IH program will get built is if feasibility issues (such as interest rates, rental lease rates, and regulatory requirements) are addressed so private-market development can move forward.
“Without the private market, publicly funded affordable housing production will always be behind the displacement curve. Portland needs more housing at all income levels, and we need the private sector to be part of the solution to address our affordable housing needs,” said PHB Interim Director Molly Rogers. “Inclusionary Housing works. It is helping us achieve more mixed-income buildings and neighborhoods throughout our city, and incentivizing housing production in the Central City despite the broader economic challenges in the market. But we need to revisit some of our assumptions for areas outside of the Central City. These studies and the expertise of our work group members have given us a roadmap for how to move forward and continue the success of the program.”
Earlier today on Monday, July 10, the IH stakeholder work group met for the final time to discuss recommendations for potential changes to the program, including:
- Extending the full-building property tax exemption to projects outside the Central City that include 60% Area Median Income units.
- Simplifying administration and design features to increase the flexibility and accessibility of the program.
- Other changes to help fulfill the original intent of the program in light of current market conditions.
A more detailed recommendation letter from the work group will be posted to the project webpage later this month followed by a final consultant report in August.
Over the next 12 months, BPS will work with other bureaus and external stakeholders to develop a Housing Production Strategy (HPS), which will be informed by the Housing Needs Analysis. The HPS will identify specific additional actions the City will take in the coming years to further encourage housing production. These actions could include zoning code and map changes, regulatory reforms, financial incentives, funding, land acquisition and preservation, and partnerships, and must take into consideration the impacts on low-income households, communities of color, people with disabilities, and other state and federally protected classes. BPS will bring a framework for the HPS to Council by the end of 2023, with anticipated adoption by Council in 2024.
“BPS’s long-range and strategic-planning role means we’re looking ahead – even as we’re solving for today’s problems,” said BPS Director Donnie Oliveira. “The Housing Needs Analysis addresses the housing problem by evaluating our current inventory and analyzing what we’ll need over the next 20 years. Once the 20-year need is defined, we can develop a Housing Production Strategy to meet the needs of Portlanders today and in the future.”
In parallel, City Council recently passed a resolution supporting exploration of new Tax Increment Financing (TIF) districts in East Portland and the Central City. TIF has been a critical tool for the City’s delivery of regulated affordable housing – the vast majority of which are affordable to households earning 60% of Area Median Income or below – and developing middle-income and workforce housing through projects like The Nick Fish and Lents Commons.
“In order for Portland to achieve the full spectrum of housing opportunities needed, we must consider how we catalyze public/private partnerships that deliver on our housing and economic priorities in critical geographic areas like East Portland and the Central City,” said Prosper Portland Executive Director Kimberly Branam. “This work furthers critical elements of Advance Portland’s inclusive economic growth plan, and we’re looking forward to collaborating and innovating with partners to ensure its success.”
City Council will host a work session on Tuesday, July 25, where it will review and discuss the results of these collective studies and chart a pathway forward.