Solutions to Workforce Housing Problems Won't Be Found in the Market Alone

By Roger K. Lewis
Saturday, February 18, 2006

A recent Washington Post (Feb. 7) Metro headline -- "Cut in Planned Homes Dilutes an Urban Vision for Tysons" -- summarized a report transcending both Tysons Corner and urban design. Written by Post staff writer Alec MacGillis, the story illuminates a systemic national problem: the challenge of creating housing, near workplaces, that America's workers can afford despite market conditions favoring development of housing that workers cannot afford.

The Post reported that a Tysons Corner property owner and developer, Lerner Enterprises, plans to build fewer, larger condominium units than county planners and political officials had intended or anticipated. Lerner's economic reasoning is simple: Given the market, there is less risk and greater profit in selling pricier, more commodious units loaded with amenities.

Lerner knows that a single 2,000-square-foot apartment may not cost twice as much to build as two 1,000-square-foot apartments and that revenue from increased square footage and marked-up luxury items, especially fancier baths and kitchens, is where sales margins are potentially greatest. Per square foot, there is more money in selling bigger spaces.

Having done the math, Lerner, like other developers, feels little incentive to build large quantities of smaller, affordable units for which profit margins per unit are much slimmer and for which always-variable absorption rates must be much higher. Developers also know that affluent buyers are less affected by volatility in interest rates and employment.

According to MacGillis's report, Lerner's managing director of construction, Peter M. Rosen, offered a concise, unambiguous explanation of the developer's thinking: "We respond to the market. The company would be willing to build more and smaller units if you guarantee the market." Fairfax County, MacGillis reported, had envisioned another scenario but "wasn't exact enough in its demands: It extracted an agreement only for a minimum number of residential square feet, not of housing units."

Consequently, the county's desire for denser, mixed-use development near Tysons's planned Metro stations, including substantial amounts of diverse, affordable housing for people working at Tysons Corner, may go unfulfilled.

This emblematic story could be written about scores of other cities and counties where similar market and demographic conditions exist, and where attempts by public officials and civic leaders to encourage private development of affordable housing have fallen far short of need.

It once again illustrates fundamental truths concerning both free-market real estate economics and admirable public policy aspirations regarding housing: When financial incentives and regulatory mandates are lacking, affordable housing for many employed in the nation's workforce will not be developed privately.

The Post report implicitly demonstrates the need for specificity not only in setting public policy objectives, but also in crafting fine-grained land-use plans and regulations aimed at achieving specific public policy objectives.

It also reminds us that there's no free lunch.

Today's land and construction costs, coupled with market characteristics geared toward the well-to-do, make private development of workforce housing in many locations unachievable without economic subsidies.

Investing in affordable housing can be as attractive as investing in upscale housing only with effective subsidies, which exist in several forms: direct project grants; reduced loan interest and property taxes; and income tax credits for affordable housing investments. But each of these entails money that ultimately comes from taxpayers. The widely used and seemingly less costly way to provide subsidy incentives is to decrease per-unit land costs through increased density. By allowing denser development and more market-rate units on a site, density bonuses presumably generate additional profits that subsidize below-market-rate units.

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