On February 1, 2017, an inclusionary zoning ordinance came into effect in Portland, mandating that all new residential projects with 20 or more units dedicate a portion of the building to affordable housing.

For the first year, the requirement was 8% of all units for households earning 60% of the Area Median Income or 16% of all units for households earning 80% of the AMI. I’m not sure if it was or is possible to do a blend of the two income levels.

After the first year, the requirement was supposed to step up to 10% and 20% of all units, respectively. But that step up was never enacted, which had many industry analysts arguing that it was a clear signal the ordinance was not performing as intended.

According to Joe Cortright of City Observatory (which is based in Portland), the new ordinance largely resulted in 3 things happening:

(1) Developers rushed to get new applications in during the transition period so that they would not be subjected to the new IZ rules; (2) applications increased for projects with less than 20 units (avoid the rules by building smaller); and (3), following the initial transition surge, building permit applications, as a whole, dropped off.

This last point is what usually comes up in debates around inclusionary zoning. Does the requirement to build affordable housing actually reduce overall housing supply?

I’ve written about this before, but the math is pretty simple. Inclusionary zoning policies are a drag on revenue and a direct cost to the project. What that means is that something else will need to give in order for the numbers to balance.

That could come in the form of lower costs (such as an impact fee abatement) or in higher rents on the balance of the units. But this latter approach is easier said than done. Sometimes you need to wait for the market to “catch up”, which could be what some developers in Portland are doing.

They’re waiting for housing to get more expensive — overall — so they can then offset the pro forma drag from the affordable units.