Inclusionary Zoning in Portland: Progress, Pitfalls, and Opportunities Ahead

A recent conversation with Sightline Institute director Michael Andersen provided some insight into the future and efficacy of inclusionary zoning (IZ). While a few locations around the nation have tried inclusionary zoning, also known as inclusionary housing, it has frequently undergone modifications or even repeals. Planners find IZ very appealing as a solution to housing affordability, while developers do not.

Inclusionary Zoning: What Is It?

Several American communities have used inclusionary zoning to provide affordable housing. New York, San Francisco, Los Angeles, Boston, Seattle, and Washington, D.C. are a few noteworthy examples. San Francisco is among the cities that have implemented and later modified their IZ rules in reaction to market forces. Likewise, Denver modified its IZ restrictions, and Miami repealed them entirely.

Political, economic, and neighborhood considerations frequently influence the effectiveness of inclusionary zoning laws. When developers strongly object or when market conditions shift, cities sometimes respond with changes, but only sometimes and only sometimes very quickly.

In February 2017, the City of Portland implemented its IZ policy. The regulation required new market-rate developments to designate a specific proportion of their units as affordable. While inclusionary zoning aims to increase affordable housing, it often produces smaller units and can lead to higher market rents, impacting overall affordability. Frequently, the less expensive units are smaller, or if not, those paying full market rents face slightly higher rents to compensate for the price of the affordable ones.

Although the goal is to promote mixed-income communities, giving people from different socioeconomic backgrounds a chance to live closer to one another, the real results of this policy have generated much discussion among industry participants.

According to preliminary evaluations, Portland's implementation of IZ fell short of its lofty objectives. Since 2017, the program has produced about 1,000 residences, according to Andersen. However, many of these were only slightly below market prices, frequently at around 80% of the Area Median Income (AMI). Such a degree of affordability does not significantly mitigate the home affordability dilemma. This raises questions about the effectiveness of these tax abatement programs, as they use significant public funds to regulate and implement some value offsets without yielding substantial results.

Portland's program, which primarily applies to projects with 20 units or more, unintentionally encourages developers to build smaller buildings or multiple smaller buildings on separate lots. This policy flaw leads to the construction of fewer affordable homes.

Issues with Insufficient Funding: Although IZ initiatives receive some funding, their reach is limited to central Portland only. As a result, the program's efficacy becomes even more uneven, resulting in a patchwork of success and failure based on geography.

Market Conditions: Because of the perceived financial risks, developers are becoming increasingly reluctant to participate in the IZ program. When projects "don't pencil," they stall, and no construction occurs.

Possibilities for Enhancement

Andersen highlights the necessity for a stronger foundation for inclusionary zoning in light of these difficulties. He suggests the following as possible remedies:

1. Improved Funding Mechanisms: Increasing tax abatements might maximize unit affordability and promote development in high-demand locations without sacrificing project viability.
2. Local Adaptability: Local governments should be able to modify their strategies in response to community needs and market situations, even when a state-level amendment to the IZ Act is being considered.
3. Sincere Evaluation of Costs vs. Benefits: Shifting from ideological arguments to a data-driven evaluation of the program's effects would encourage more fruitful discussions between stakeholders and decision-makers.

The Way Forward

As Oregon prepares for potential legislative changes in 2025 and the governor's target of constructing 36,000 units annually, industry leaders are increasingly agreeing that updating the IZ program to support affordable housing is necessary. Given the projected rise in housing demand in the upcoming years, active participation in these conversations will be essential for multifamily developers and investors.