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Will developers still build housing in PDX under the inclusionary zoning policy?

While developers haven't lost the desire to continue to add residential units to Portland, some of them might have lost the ability to make it economically viable.

Two developers in Portland are focusing on their current project as they readjust to the inclusionary zoning policy, taking effect Feb. 1, before thinking about building more.

Made possible by the 2016 Legislature when it repealed the statewide ban on inclusionary zoning, in late December the Portland City Council went to work to pass the policy that requires developers to include affordable housing in any residential development with more than 20 units (with options and incentives).

Vanessa Sturgeon, CEO and president of TMT Development — developer of Park Avenue West — told the Business Tribune she does not have further plans to develop residential in the city.

"No. We have put all of our plans to build housing on hold," Sturgeon said. "We're not going to build anything in the next five years."

Right now, Sturgeon has one project under review along Hawthorne Boulevard that made it to permit before inclusionary zoning went into effect.TRIBUNE FILE PHOTO - Vanessa Sturgeon, CEO and president of TMT Development, is the developer of Park Avenue West. She has no plans to build more residential units in the city.

"That's our next focus," Sturgeon said. "I'm pretty bullish on starting to go out to the east side of Portland, toward Gresham."

Sturgeon told the Business Tribune that only the inclusionary option to build 10 percent affordable units for those who make 60 percent of the median household income is workable.

"I'm disappointed. I think it's better than the original proposal because there is one proposal that pencils out," Sturgeon said. "Not a lot of units are going to get built like that, but it is a workable proposal in that way."

She said the 20 percent affordable units for those who make 80 percent of the median household income is not workable from a development standpoint.

"You're going to see people building less, and I'm afraid we are pushing ourselves toward a San Francisco housing model where middle incomes are priced out," Sturgeon said.

She said she thinks most developers will focus on smaller, 19-unit projects, or commercial, office and retail space instead.

"Either that, or potentially very large projects, which are few and far between anyway," Sturgeon said. "In our industry, that's what everybody is planning to do because you can build commercial instead and get much better returns, so people will do office and retail projects instead. That is economically viable and that's where we're going to put our focus."

Good intentions, unintended consequences

Robert Ball, CEO of Robert Ball Co. — developer of The Avenue Lofts, The Wyatt and The Parker — said he's focusing on his current project uptown along Northwest 21st Avenue and Kearney Streets, which has 4,500 square feet of retail with 27 apartments up above.

"The simple answer is that I don't have any projects other than the one I'm building now specifically lined up," Ball said. "The passage of inclusionary zoning, although potentially making it more difficult and potentially even halting and effort … I have no plans to not try to develop in the city."TRIBUNE FILE PHOTO - Robert Ball, CEO of Robert Ball Co., is the developer of The Avenue Loft, The Wyatt and The Parker — named after his son, Parker. Ball said he wouldnt mind building more residential under inclusionary zoning, as long as he can get the projects financed with the slimmer margins.

Ball said he doesn't have specific plans for his next project.

"I'm not saying I wouldn't build another larger project because of inclusionary zoning, but the incentive would have to be there to make sure I can get financed in the marketplace," Ball said. "Lending institutions require you have built-in margins so they feel safe making their loans. The capital markets will not lend if they feel the projects are being built with too skinny of a margin."

Ball said the policy is well-intentioned, but might not work on its own and could have unintended consequences.

"By far, the biggest thing that we can do as a city to have an impact on our housing crisis is to increase supply," Ball said. "When you actually put restrictions like inclusionary zoning on housing, that is not going to help increase supply — in fact, it may constrict if further."

He's not against inclusionary zoning if the incentives are adequate, as long as the projects still pencil out.

"I am confident that the single biggest thing that we can do to help the housing crisis is increase supply, and that is just basic economics, and it's sad that we can't get there," Ball said. "I don't think it's politically difficult to say that actually, the best way to solve the problem is to make it easier to build more and less expensive. That's the reality of what it really takes to get it done."

But more layers of bureaucracy, requirements and permitting create a costly situation for developers, making it harder to build projects.

"The last thing we need to be doing right now is constricting supply. It should be the opposite — we should be figuring out how to make it faster, less expensive and build as many units as possible to ease the market," Ball said. "That alone will get us where we need to go: we need to increase supply. Supply, supply, supply."

Due to the market's demand, some new buildings have been giving a discount, or a few months of free rent.

"The reason why they're doing that is because of supply. That automatically shows you the market wasn't strong enough for them to rent them up at face value," Ball said. "Any new supply probably underwrote certain rents they hoped to get: the more supply there is in the marketplace, the harder it is to be able to charge higher rents."

Ball said he has no specific plans to develop further beyond his uptown building, but said he plans to continue to pursue building residential in the city.

"I do, I do (think I'll continue to build residential), there's no reason why I wouldn't, if they pencil out," Ball said. "But if they don't pencil, no one will. Projects have to work."

He warned that well-intentioned items like the policy could have a different result than originally desired.

"If we wanted to really have an impact on the market because so many people are moving here, we have our construction of new units has to keep up or outpace the number of new household formations coming to Portland," Ball said. "And if we don't, it doesn't matter what we do, we will turn into one of the cities you see like San Francisco or New York City where you have the very rich and the very very poor."

Rent as a function of the market

Ball grew up with a harsh family situation, and his heart goes out to those who are evicted.

"I grew up with a single mom and our financial situation was so tenuous, I could imagine if we got a rent notice we had to vacate … I fully understand, and the reality is that I think most landlords, they don't want to lose their tenants either, but they want to get market rates for their places and so forth," Ball said. "I know there's been pain and suffering from tenants who have had eviction notices given to them, and I don't like to see that either. I don't think any of us do. In my heart of hearts I firmly believe the best way to solve that is to increase supply."TRIBUNE FILE PHOTO - Bob Ball, holding his son, Parker, left, visits with tenants Lisa Moose, David Carroll and Cristian Gonzales next to an outdoor fireplace in the courtyard of the Northwest apartments.

Matthew Tschabold, policy and equity manager with the Portland Housing Bureau, said rents are a function of the market.

"The market is what drives rents and usually property owners and property managers can't charge a higher rent than the market is willing to bear," Tschabold said. "What studies have said, what economists say and I'd agree with, is that if people think the market is not already charging the maximum rent it can charge, it's probably not true."

He said studies show inclusionary housing programs don't tend to have a significant impact on the price or supply of housing when proper incentives are offered.

"Each individual developer has their own business model and they're going to make their own choices," Tschabold said. "I don't think there's limitless demand for office space in Portland; similarly, I don't think there's limitless demand for residences in the suburbs."

In every zone of the city, there are five or six options for developers to comply with the new policy.

"Our goal was to provide enough options calibrated to a level that economically would have a minimal effect on the economics of the building," Tschabold said. "We've been a success at that: our modeling shows for the most part in most areas of the city, the inclusionary housing requirement is economically offset with the incentive offered by the city."

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