For many cities, the housing storyline remains unchanged: Demand for multifamily housing is far outpacing our industry’s ability to create supply.
The number of renter households grew from 35.7 million in 2000 to 43.8 million in 2016. During that period, the number of affordable apartments for low- and middle-income renters fell short of meeting demand by 1.2 million units. It will get worse if we can’t work with cities to do something about it. Research from Hoyt Advisory Services found the U.S. needs an average of 328,000 new apartment units annually to meet rising multifamily demand.
While affordability challenges are complex, local, regional, and state policymakers have alternatives to what we know are ineffective policies. Here are five things our industry needs to encourage cities to do to bring more affordable multifamily inventory to market.
1. Rethink Policies That Escalate Development Costs
To reduce rent by $100 per month per unit, development costs must be reduced by $20,000. With hard costs (materials and labor) increasing 57% since 2000—and land costs roughly doubling—finding cost savings can be tough.
Oftentimes, municipalities institute new regulations that further contribute to rising development costs and, in turn, higher asking rents. For example, a community exaction for a public open space generates added costs to secure approvals. Approval delays and additional predevelopment studies also raise costs while slowing the delivery of inventory to market.
New development requirements also can be problematic. In one community, we found a new requirement for an on-site stormwater retention system could bump rents up by $60 to $85 per unit per month. And, of course, property tax increases can contribute to higher rents. Cities need to better understand the context under which they are considering such policies and the ultimate effects on affordability and inventory growth.
2. Embrace Density
The same 1 acre that can fit three single-family detached homes can house a 15-story, 176-unit multifamily building. A 2013 report from Smart Growth America notes denser development generates 10 times more tax revenue per acre than conventional suburban development.
One example of density’s impact: A 30% increase in total units at a mid-rise apartment building in the Northeast can lower the required rent per unit by $200 per month, while a density reduction of 30 units in a 200-unit building can raise asking rents by $70 to $140 per month.
3. Consider New Uses for Public Land
Land owned or controlled by government or quasi-governmental entities—including transit agencies, housing authorities, redevelopment agencies, municipal facilities, and school districts—can often provide prime space for new multifamily development. Creative and collaborative public land policies can help developers acquire these assets at reduced rates, allowing them to lower their development costs and asking rents. While such policies need be tailored to individual markets, core components should include a broad portfolio of publicly controlled land, a defined selection process, and a means for maximizing the value of the public land.
4. Explore Incentives
Property tax incentives play an integral role in both increasing the supply of rental housing and lowering asking rents. By offering a net reduction in property taxes, municipalities can drop operating costs for developers. When exploring tax incentives, municipalities should conduct a “but for” test to ensure that the units developed in response to an incentive would not have been built otherwise. This allows for the most effective use of limited public resources.
An example of incentives at work: Despite a development boom since 2000, Jersey City, N.J.’s growth was uneven across neighborhoods. To address this, the city implemented a four-tier tax incentive program specifically to maximize development and equitably distribute affordable and market-rate housing across neighborhoods.
5. Avoid Rent Control
Capping asking rents limits profit margins for developers, giving them little incentive to build new projects. It also makes converting existing apartments into condos more attractive to property owners, which creates more inventory for higher-income renters and results in displaced residents. Over 47.4% of current renter households struggle to afford rent, spending more than 30% of their income on it. Rent control is also expensive for municipalities to administer and produces no new housing units.
Constructing policies to support new multifamily development requires strong collaboration between municipalities and developers. Successful collaborations result in increased availability of affordable multifamily units in urban cores that can help grow the local workforce while strengthening a city’s productivity.
Data cited in this article comes from NMHC’s Housing Affordability Toolkit. For more information on affordability strategies, visit housingtoolkit.nmhc.org.