New Research: Improving Rules and Engagement in the Washington, DC Region

Earlier this month, ULI Washington released a new report on Increasing Housing Supply and Attainability: Improving Rules & Engagement to Build More Housing. Neighborhood Fundamentals was a proud contributor to this report, along with Rhodeside & Harwell and other members of the region’s ULI Housing Impact Task Force. Click “read more” for findings and recommendations.

Building a Better Understanding of the Dimensions of Housing Supply

By Michael A. Spotts

Conversations about housing affordability (that is, the relative attainability of market-rate housing) and efforts to provide committed affordable housing are often contentious. First, even in progressive areas there is no consensus that affordability is something worth promoting – a debate that is often tied to conceptions of economic status, property values, and most perniciously, prejudice. However, as affordability challenges worsen, there can be sharp disagreement even among those that believe affordability matters and there is a government role for promoting housing choice. These disagreements are varied and it is outside the scope of a single blog post to comprehensively address each. However, one of the main points of debate (at least in the context of hot markets) centers on whether new market-rate development makes things better or worse.

During the research process for the Northern Virginia Affordable Housing Alliance report on Building Northern Virginia’s Future, the Neighborhood Fundamentals research team explored existing literature and analysis on this issue. We found that the answer is “it depends,” particularly as it relates to who benefits from adding housing supply. Development has different impacts for renters vs. homeowners, median-income vs. low-income households, etc. This is not because housing fails to conform to the fundamentals of economics. Rather, it is because there is no singular “housing market.”

In the last week, Shelterforce has published two thoughtful, informative articles that provide more information on the data and economic theory that inform discussions of housing economics. In reality, a housing market is made up of interrelated sub-markets that vary by scale, geography, tenure, building/unit type, and targeting (luxury, middle, affordable), among other aspects (which I often refer to as the various “dimensions of supply”). For more information on those market dynamics and the challenges in predicting the impact of new supply on affordability at the sub-market level, I encourage you to read the full articles featuring Jamaal Green, Miriam Zuk, and Vicki Been and Rick Jacobus.

In recognition of these dynamics, the policy recommendations offered in Building Northern Virginia’s Future were explicitly designed to address the various dimensions of housing supply. Specifically, we argued that the region cannot focus solely on the aggregate number of units that its constituent jurisdictions permit. High-end production has its place, particularly in reducing the pressure that leads to moderate-rent apartments “filtering up,” as investors rehabilitate and reposition existing properties. However, special attention must be paid to eliminating the barriers to housing that will more directly serve low- and moderate-income households.

First and foremost, the production and preservation of subsidized, income-restricted affordable housing serves that goal, both by directly providing housing for low-income households and reducing competition for lower-cost market-rate units. In addition, local governments should review their land use and zoning codes to identify barriers to the development of more naturally affordable housing types. There is strong regional demand for duplexes, triplexes, townhomes, and walk-up apartments. However, we found that these housing types are (generally speaking) more difficult to build from a regulatory perspective than the much criticized “McMansions” that are replacing more modest detached single-family homes throughout many of the region’s neighborhoods. Promoting new construction of more modest housing requires revising land use and zoning rules. In addition, it is necessary to examine the aggregate impact of other associated development requirements related to minimum lot sizes, floor-area ratios, lot coverage ratios, and off-street parking, which can make ostensibly legal housing types impossible to build. As difficult and controversial as achieving such policy change may be, there is precedent from cities such as Grand Rapids, Portland, Minneapolis.

As the aforementioned Shelterforce articles illustrate, both policy design and coalition building efforts to advance reform require a more informed and nuanced conversation about supply-demand dynamics across sub-markets. Otherwise, at best we will advance half-solutions that fail to address the underlying systemic challenges of our housing system. It is to the region’s benefit that we can draw on the lessons from a growing body of housing research and the real-world experiences of policymakers in other jurisdictions to create a better, more equitable development paradigm.

Building Northern Virginia’s Future: Yes, preservation has a role in equitable supply growth

By Michael A. Spotts

Last week, the Northern Virginia Affordable Housing Alliance released: Building Northern Virginia’s Future: Policies to Create a More Affordable, Equitable Housing Supply and a companion Research Justifications report, which were produced by Neighborhood Fundamentals (see full overview). Over the next several weeks, this blog will highlight some of the key findings and recommendations from this research. Today’s post takes a closer look at how supply growth and preservation can be complementary approaches to improving affordability across the income spectrum.

As part of Building Northern Virginia’s Future, the research team reviewed a wide range of literature regarding the impact of supply growth on affordability in high cost, high growth markets. Available evidence confirms the basic economic theory that constraining development contributes to increased housing costs. However, the evidence also suggests that benefits of new development do not accrue evenly. While median costs may fall (or rise less quickly), specific neighborhoods can see significant cost increases and the stock of homes affordable to lower-income households may decline. Therefore, adding housing supply is necessary but not sufficient to meeting the full range of housing needs. Efforts to produce committed affordable housing for low-income households, and preservation in particular, are critically important to ensuring that the most vulnerable households do not bear disproportionately negative impacts.

Market conditions in the Washington, DC and inner-Northern Virginia region demonstrate the need for preservation. Since the end of the Great Recession, new development has lagged compared to historical trends.

Urban Inst Pop Change.png

The nature of regional population and economic growth also creates challenges. Growth has been disproportionately at the highest and lowest ends of the income spectrum, particularly among renter households. With insufficient new supply to absorb this demand, the cost of existing units has increased. As we highlighted in our June 2018 report on Northern Virginia’s Preservation Challenge, new construction has been focused on higher-end units, leading to some investors shifting their focus to purchasing more modest apartments. These “value-add” investors often conduct light rehabilitation work to reposition the property and raise rents. While this helps fill the housing gap for middle-income households, it often reduces the number of relatively affordable options for lower-income renters.

Main - Figure 2- Changes in Rental Units and Households, Washington DC - Harvard JCHS - Copy.png

As we highlighted in Building Northern Virginia’s Future:

  • From 2000-2018 the cost to rent a two-bedroom apartment in Alexandria increased by 104 percent (Seau and Jovovic; City of Alexandria). Had Alexandria’s rental housing costs simply increased by the rate of inflation, rental costs for such units would be nearly 43 percent lower than current rates. The City of Alexandria saw an 88 percent reduction from 2000-2018 in market rate units affordable at 60 percent of AMI (from 18,218 to 2,236 units).

  • From 2000-2017, Arlington County lost over 14,500 rental units affordable to households earning 60 percent of area median income (AMI) or less, mostly as a result of increases in rent (Arlington County). There were only 2,445 such units left in the County, with approximately 11,000 additional units affordable between 60 and 80 percent AMI.

  • A separate analysis found that the inflation adjusted increase in rents from 2011 -2017 was 4.0% in Arlington and 3.9% in Fairfax County. During this period, Loudoun County had the largest rent increase in the Washington, DC region, at 11.3% (Urban Institute).

Therefore, despite being superficially counter-intuitive in nature to discussions of increasing housing supply, preservation of existing housing affordable to low- and moderate-income households is an important component of a comprehensive strategy. From the perspective of “first do no harm,” preservation can reduce short-term displacement and minimize the disruptive impacts of development to a given household. For those who oppose new development on the basis of potential loss of affordability, a robust preservation strategy can provide evidence that the jurisdiction/developers are acting in good faith when adopting development-friendly policies meant to increase overall housing supply. Finally, preservation can also enable future increases in affordable housing supply. Bringing increasingly valuable land under mission-driven control provides the flexibility to participate in a redevelopment strategy later, at current acquisition prices. Future development can utilize increases in density and/or other incentives to replace and potentially expand the number of affordable units.

Northern Virginia’s Preservation Challenge offered a wide range of policies that can support preservation in the region. From the various specific recommendations offered by the report, the four highest-level policy priorities include:

  • More effectively using public subsidies to leverage/attract private capital for preservation;

  • Building capacity to preserve smaller-scale buildings in high-opportunity neighborhoods;

  • Adopting or improving property tax abatement programs to increase utilization by private, market-rate owners;

  • Encouraging equitable redevelopment through zoning and land use flexibility.

Efforts to balance supply growth with preservation are even more important in the context of potentially catalytic investments by the public and private sectors. Notably, the arrival of Amazon and a new Virginia Tech campus will create demand pressures, particularly within a short commuting distance of Crystal City/Potomac Yard. Stay tuned to the Neighborhood Fundamentals blog for additional analysis of this subject and other key takeaways from Building Northern Virginia’s Future.

 

Interested in learning more about addressing housing affordability challenges in your community or region? Email info@neighborhoodfundamentals.com.

New Publication - Building Northern Virginia's Future: Policies to Create a More Affordable, Equitable Housing Supply

By Michael A. Spotts

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In recent years, the issue of housing affordability has gained prominence in the national dialogue. Efforts to address the rising costs for safe, decent homes have generated substantial debate about the role of market-rate development, the availability of committed affordable housing, and the causes and impacts of gentrification. Neighborhood Fundamentals is pleased to announce the release of two new publications for the Northern Virginia Affordable Housing Alliance that address these topics: Building Northern Virginia’s Future: Policies to Create a More Affordable, Equitable Housing Supply and a companion Research Justifications report.

This body of research examines the factors that are influencing housing costs in the inner-Northern Virginia region – population and economic growth, demographic change, shifting consumer preferences, among others. It also discusses the factors that have inhibited the growth of an equitable housing supply, including local land use and the regulatory framework. At a high level, this research found that addressing affordability across the income spectrum involves more than simply increasing development. Adding new housing supply may have varying impacts on affordability, particularly for those with the lowest incomes. An equitable approach to development addresses supply needs across multiple dimensions, including tenure, building type, and location/neighborhood characteristics.

This report offers recommendations to advocates, policymakers and practitioners for improving affordability while advancing social equity. The recommendations reflect the notion that the most urgent action should be directed to the areas of greatest need and to the region’s most vulnerable residents. Recommendations are organized into four categories:

  • Proactively preserve and expand housing options for the region’s low-income and historically marginalized households;

  • Increase market-rate development and diversify the region’s housing stock to accommodate household and job growth;

  • Undertake bureaucratic improvements to improve the efficiency of current policies;

  • Improve communications and community engagement processes to better facilitate the policy changes necessary to improve affordability.

Each category includes specific recommendations that the region’s elected officials, city/county staff, funders, and developers can support to improve the region’s development climate, improve affordability, and increase access to opportunity for all of the region’s residents.

Interested in learning more about addressing these challenges in your city or region? Email info@neighborhoodfundamentals.com.

Northern Virginia's Preservation Challenge: A Closer Look at the Route 1 Corridor

By Michael A. Spotts, President

Following up on the June release of the Northern Virginia Affordable Housing Alliance's (NVAHA) research on Northern Virginia’s Preservation Challenge: Trends, Threats, and Opportunities, last week NVAHA and the Coalition for Smarter Growth hosted A Community Forum on Preservation through a Lens of Equity and Inclusion. This forum focused on the redevelopment of Fairfax County's Route 1/Richmond Highway Corridor. The area is the subject of the EMBARK Richmond Highway multimodal transportation plan. The corridor is relatively diverse, and includes a significant number of market-rate rental properties that serve low- and moderate income households. Fairfax County is commencing a planning strategy to address the challenge of preserving affordability within the corridor so that the catalytic transportation and redevelopment investments benefit the people who currently live there, especially those most vulnerable to displacement.

In addition to presentations and/or comments by Fairfax County Supervisor Dan Storck, NVAHA's Michelle Krocker, and the Coalition for Smarter Growth's Stewart Schwartz. The event was headlined by a practitioner panel discussion, which featured: 

Nicholas Bracco – The Michaels Organization
Karla Bruce – Chief Equity Officer, Fairfax County
Nina Janopaul – Arlington Partnership for Affordable Housing
Shelley Murphy – Wesley Housing Development Corporation

I also had the pleasure of presenting Neighborhood Fundamentals' preservation research, conducted on behalf of NVAHA.

Resources from the event are included below:

Presentation: Northern Virginia’s Preservation Challenge: Trends, Threats and Opportunities - Michael A. Spotts
Presentation on Columbia Pike Plan – Nina Janopaul, APAH
Presentation on One Fairfax Policy – Karla Bruce, Fairfax County
EMBARK Richmond Highway Comprehensive Plan Update Affordable and Workforce Housing Map
Opportunity Zones Located along Richmond Highway

For more information on this research, please contact Michelle Krocker, Executive Director of the Northern Virginia Affordable Housing Alliance and Michael A. Spotts, President of Neighborhood Fundamentals, LLC

June Roundup: Cross-Sector Coordination, Preserving Rental Housing, Comments on Facility Co-Location, and Other Notes

By Michael A. Spotts

As summer (and vacation season) starts, it's easy for news and events to slip through the cracks. To bring everyone up to speed, here's a roundup of what Neighborhood Fundamentals has been doing over the last month:

New Report: Northern Virginia's Preservation Challenge

By Michael A. Spotts

On June 20, the Northern Virginia Affordable Housing Alliance (NVAHA) released research produced by Neighborhood Fundamentals on Northern Virginia’s Preservation Challenge: Trends, Threats, and OpportunitiesThis report is a follow up to NVAHA’s 2011 report, Charting a Way Forward: Preserving Market Rate and Affordable Housing in Northern Virginia’s Inner Suburbs, authored by Angie Rodgers.

Like many high-cost regions throughout the country, Northern Virginia’s inner jurisdictions of the City of Alexandria, Arlington County, and Fairfax County are experiencing cost increases and the loss of rental units affordable to low- and moderate-income households. Investors are actively seeking out lower-cost market-rate and expiring subsidized properties in order to benefit from increasing rents and potentially capitalize on redevelopment potential. Northern Virginia’s Preservation Challenge provides a detailed overview of both regional and national trends, analyzes the barriers to preserving affordable housing, and identifies opportunities for overcoming those barriers. Specifically, NVAHA and Neighborhood Fundamentals collaborated to develop 22 recommendations for the region’s governments, funders, and developers. These recommendations fall into three broad categories:

  • Interventions to help mission-driven developers acquire properties;
  • Interventions to encourage existing owners to maintain affordability; and
  • Incentives to encourage affordability through rehabilitation and/or redevelopment.

The four highest-level policy priorities include:

  • More effectively using public subsidies to leverage/attract private capital for preservation;
  • Building capacity to preserve smaller-scale buildings in high-opportunity neighborhoods;
  • Adopting or improving property tax abatement programs to increase utilization by private, market-rate owners; and
  • Encouraging equitable redevelopment through zoning and land use flexibility.

We hope that this report will serve as a call-to-action. As resources remain constrained, it is imperative now more than ever to coordinate policy, programmatic, and funding activities that will save the affordable homes that already exist.

For more information on this research, please contact Michelle Krocker, Executive Director of the Northern Virginia Affordable Housing Alliance and Michael A. Spotts, President of Neighborhood Fundamentals, LLC

Measuring Housing Credit Cost-Effectiveness Post-Tax Changes

By Michael A. Spotts

The Tax Cuts and Jobs Act of 2017 (TCJA) had significant effects on the delivery of affordable rental housing. Most notably, the decrease in the corporate tax rate is expected to reduce the amount of Low Income Housing Tax Credit (Housing Credit) equity available for new construction and preservation efforts, potentially reducing production levels by more than 200,000 units over the next decade. The implications of the TCJA and efforts to fill this new gap have rightfully received a great deal of attention among affordable housing practitioners. However, I do want to call attention to an under-explored implication of the TCJA's provisions that could influence how the effectiveness of the Housing Credit is viewed - the law's impact on metrics.

Over the past six years, I have spent a considerable amount of time studying the cost-effectiveness of affordable housing production and the Housing Credit in particular. Through this work, I have observed numerous metrics for evaluating costs - total development costs, total subsidy required, leverage ratios, etc. These metrics have varying relevance in different contexts.

The TCJA's corporate tax rate reduction is having a significant impact on production figures based on Housing Credits per unit (and the inverse, the number of units produced for a given amount of credits). For those less familiar with the Housing Credit, one of the relatively unique elements of the program is that that unlike a grant, the subsidy awarded - an allocation of tax credits that can be claimed over ten years - is generally not equal to the amount of equity that the developer ultimately receives. Equity investors purchase Housing Credits from developers based on their perceived value, which takes into consideration discount rates (equity is provided upfront, while credits are claimed over a decade), macroeconomic conditions, regulatory requirements, and local market factors, among other elements. The amount of equity raised per credit can vary significantly, and can be higher or lower than a 1:1 ratio depending on the context.

A lower corporate rate affects this calculation and reduces the amount of upfront capital available per unit. Estimates of this reduction (at the aggregate level) reach approximately 14%. This reduction began before the TCJA passed, as investors began anticipating and "pricing in" future changes.  

Why does this matter, beyond the bottom-line reduction in units and increased need for subsidy to fill the gap? Perceptions of a program's effectiveness are often shaped by metrics. With equity prices lower, developers will be able to produce fewer units per Housing Credit awarded, even if their development costs have stayed the same or fallen. While the drop in productivity (again, on a per Credit basis) is technically true, any assessment of the effectiveness of Housing Credit allocators and developers must take this extraneous factor into account. 

Cost-effectiveness is critical in a resource-constrained environment. There are many metrics that are effective in measuring development cost trends, and those metrics should be used to inform any policy or programmatic changes. Moving forward, it will be important to avoid drawing conclusions from the wrong metric, and all assessments of the Housing Credit program should be done in the context of the TCJA provisions.

New Resource: Meeting the Housing Needs of Older Adults in Montgomery County, MD

By Michael A. Spotts, President

Over the last 9 months, I joined Lisa Sturtevant and Spencer Shanholtz of George Mason University's Center for Regional Analysis in studying senior housing needs in Montgomery County, MD. The result of this effort is the publication of Meeting the Housing Needs of Older Adults in Montgomery County, which we presented to the County's Planning Board on May 24. A summary of our key findings and recommendations can be found at the County's website.

As the number of older adults (both locally and nationwide) continues to rise, the demand for housing that serves this population will also rise. This includes senior living facilities (independent living, active adult units, assisted living, and nursing care facilities). However, one of the findings that particularly struck me was that more than 85% of older adults in Montgomery County live in housing units that are not age restricted. They live in homes that serve the general population, whether market-rate or affordable. As such, meeting older adults' housing needs requires a thoughtful general housing policy infrastructure, which can be complemented with targeted policies for households with additional needs. The same elements that improve affordability more broadly - adequate supply, diversity of housing types, mixed-use and walkable neighborhoods - will improve the likelihood of success for targeted interventions aimed at meeting older adults' unique needs. 

Thoughts on the latest proposals to adjust Northern Virginia's I-66 tolls

By Michael A. Spotts, President

The recently-instituted tolling policies on Interstate 66 in Northern Virginia have generated a lot of controversy since they were instituted. The old system in which only carpools, buses, and motorcycles were allowed on the route during the 2.5 hour rush hour was replaced with dynamic tolling over a four hour rush hour. The carpools, buses, and vans still use the road for free, but single-occupancy vehicles are charged a toll based on the level of congestion. As users have adapted to the system, periodic spikes in tolls have generated headlines, including the one I commented on via Twitter this morning (full thread below). As I explain, the tolling system is a good idea, but to make it sustainable (from both the financial and political perspectives), we need to also look at our land use and affordable housing policies to ensure that people actually have a choice to avoid the tolls but living in more centrally located and transit-served communities. 

A thread by Michael Spotts via Spooler

I understand that the $47 1-way tolls capture interest, but if you're going to lead with that, perhaps you shouldn't wait until the end of the article to say that the average round trip toll is $12.65 (washingtonpost.com/local/traffica…)

2- The tolling is painful, but necessary. Just a reminder, single-occupancy vehicles were not allowed at all on I-66 prior to rush hour pre-tolling. HOV is still free.

3- And w/respect to the comments about the lack of transit from Prince William & Loudon, that's a multifaceted issue, with some legitimate points, and some less so

4- There's a portion of the exurban population that truly cannot afford to live in DC or the inner-suburbs. They'd prefer the short commute, but housing costs are too high.

5- So that's on us in the inner jurisdictions for not permitting/investing in a wider range of housing choices - including family-size units.

6- But the reality is that a lot of people's discretionary preference is to live further out. Some are wealthy. Others are less-so, but valued a larger yard and more square footage (at a lower per sq ft price) when they moved out there.

7- The lack of transit in the exurbs and the traffic into DC is notorious, and should catch no one by surprise. While I understand why they are upset, we need to take that discretionary choice into account when making policy

8- Because the truth is, the previous, toll-free status quo can't work anymore. Infrastructure is too costly to continue to subsidize inefficient versions to the extent we have in the past. So what do we do moving forward?

9- In a micro sense, the proposal to lower the average speed in the algorithm makes sense. You're still pricing adequately, and allowing people to decide if the extra commute time is worth it to them.

10- But from a macro sense, we need to address the issues of the 2 cohorts from tweets 4 & 6 separately. For the 1st, we need zoning reform to create more centrally located family sized units & more affordable housing investment.

11- We need to make exurban living a choice, rather than a necessity. And in the meantime, we can do things to improve carpooling options, transit, and perhaps even a measure of means testing for the tolls for the lowest income commuters

12- And for the cohort for whom it was a discretionary choice, we need to stand firm with user fees (without price gouging), but do so more broadly, so that certain commuters pay their way while others continue to be indirectly subsidized. /end