Affordable Housing (or Build Baby Build)
I saw that there’s a bill that passed Philadelphia City Council to help encourage, well, in this case, force affordable housing. In this post, I will outline the bill, discuss the downsides, layout what actually will happen, and then tell you my plan to achieve total affordable housing domination.
The City Council website states that this “zoning bill is just one tool of many that are needed to truly address Philadelphia’s affordable housing crisis”. Per the Philly Tribune, “20% of any new buildings that house 10 or more units within the districts’ overlay boundaries must be set aside for affordable housing, with restricted pricing for 50 years.”
What could be the downside to that? Well, let’s look at the players involved. The residents would like a discount. Great! The business people have to give the discount without getting paid back. So they are unhappy.
What City Council failed to review is, does it make sense to build the project with affordable housing overlay? Probably not. I’ll make an example.
RentCafe says that “[t]he average size of new apartments in the
U.S. in 2018 is 941 square feet”. And Fixr.com says that the 5-story, 50-unit apartment building costs $10.1 million to build. That’s 47,050 square feet of space (not including common areas). If you want to avoid the affordable housing , that’s “a payment in lieu of the maximum total gross area multiplied by $18”, or $846,900. What bank is going to pony up an extra 8% of costs for zero return?
Or make 10 affordable housing units for families at 40% of Area Median Income (AMI), which I estimate to be around $39,000 per Department Of Numbers. This, from a financial perspective, may change how much money a builder can lend, since the rents are lower.
Another item that was just completely missed was the other costs for builders. Per RentCafe, apartment building challenges include “the pandemic, developers’ struggles to find qualified workers, funding, permits or the sky-high cost of lumber.”
Lastly, rent controlled apartments are unattractive for real estate investors because of the lack of income. For example, per NY Rent Own Sell, “[a]s we move forward, rent-controlled apartments are decreasing fast in number. In 50 years, numbers dropped from 2 million to merely 22,000 apartments.” There’s plenty of demand, but no supply. And no real financial incentive to create supply.
Now, how to fix this? Simple. Create a financial incentive. If you want, let’s say, 50% of units in a new 50-unit building be affordable housing, pay the developers to do so. How? Parter with them. You want 25 affordable units. A family with an annual income of $38,000 and zero debt can afford a rent of around $1300 per month. Why not just provide that as a benefit for building the units over 50 years?
And what about projects that don’t lie in the special overlay? People need affordable housing there as well. Why else are people living in Kensington? Our government has to push to create more affordable housing projects, yet, any projects, like the ones featured in West Philadelphia Collaborative History, didn’t work. Mixed-income project success comes from “[l]ocal and state regulations, incentives, and technical assistance” per the Urban Land Institute.
We are experiencing a paucity of affordable units, and putting up roadblocks won’t work. It hurts everyone that needs units. More supply helps ease demand. That’s Economics 101. Get back to work.
SOURCES:
Philadelphia City Council, PHILADELPHIA’S FIRST LARGE-SCALE MANDATORY INCLUSIONARY ZONING LEGISLATION RECEIVES FINAL APPROVAL FROM CITY COUNCIL.
https://phlcouncil.com/philadelphias-first-large-scale-mandatory-inclusionary-zoning-legislation-receives-final-approval-from-city-council/
Philadelphia Tribune, Affordable housing inclusion bill passes in City Council
Star News Philly, Rushdy: Why inclusionary zoning won’t solve Philadelphia’s affordable housing crisis
https://starnewsphilly.com/2021/10/11/rushdy-why-inclusionary-zoning-wont-solve-philadelphias-affordable-housing-crisis/
RentCafe, Despite Challenges, 2021 Apartment Construction Tops 330,000 for 5th Consecutive Year
https://www.rentcafe.com/blog/rental-market/apartment-construction-2021/
RentCafe, As Apartments Are Shrinking, Seattle Tops New York with the Smallest Rentals in the U.S.
https://www.rentcafe.com/blog/rental-market/real-estate-news/us-average-apartment-size-trends-downward/
Fixr, How Much Does It Cost to Build an Apartment Building?
https://www.fixr.com/costs/build-apartment
Community Roots Housing, Household Income and Unit AMI
https://communityrootshousing.org/find-apartment/calculate-your-income/
Department Of Numbers, Philadelphia-Camden-Wilmington Pennsylvania Household Income
https://www.deptofnumbers.com/income/pennsylvania/philadelphia/
Zillow, Rent Affordability Calculator
https://www.zillow.com/rent-affordability-calculator/
NY Rent Own Sell, How To Get Rent Controlled Apartments In NYC?
https://www.nyrentownsell.com/blog/how-to-get-rent-controlled-apartments-in-nyc/
West Philadelphia Collaborative History, Diverse Stories: Public Housing in West Philadelphia
https://collaborativehistory.gse.upenn.edu/stories/diverse-stories-public-housing-west-philadelphia
Urban Land Institute, Mixed-Income Housing Myth And Fact
http://inclusionaryhousing.ca/wp-content/uploads/sites/2/2010/01/ULI-Mixed-Income-Hsg-2003.pdf
