The Oregonian: Portland Apartment Construction Falloff
March 21, 2021
By Jamie Goldberg | The Oregonian/OregonLive
A decade of rapid apartment construction across Portland is coming to an abrupt halt, with permits for new multifamily projects down an astonishing two-thirds last year.
Portland’s decline is far outpacing other West Coast cities and economists warn the city is headed for another housing crunch, which could trigger another cycle of skyrocketing rents, displaced tenants and homelessness.
Developers say policies Portland and Oregon adopted to make housing more affordable will have the opposite effect, making rents much more expensive by severely constraining supply.
By compelling builders to include low-rent apartments in big new projects, developers and economists say Portland has created an incentive to go small — or to not build at all. And by constraining rent increases, developers argue the city and state have made it more difficult to make a profit in Portland — creating an incentive for builders to go elsewhere.
“Two, three years ago we had a housing shortage,” said Chris Nelson, principal at Capstone Partners. “I think we’re going to be back to the same place.” Housing advocates and the city itself say the developers are vastly overstating their case. Development is down, they acknowledge, but only because the pace of construction was so torrid for several years. By mandating that affordable housing be part of large developments through “inclusionary zoning,” advocates say Portland has an opportunity to remake the city as a place where every neighborhood has affordable housing and overcome decades of displacement.
“We’ve never encountered a developer who has acknowledged that now would be a good time to impose an inclusionary obligation,” said David Rosen, who consulted on the inclusionary zoning policy Portland adopted in 2017.
Regardless of the reason, there’s no doubt that developers are ratcheting back across Portland.
The number of multifamily permits issued for constructions with five or more residential units dropped by two-thirds in Portland last year, with the city issuing permits to build fewer than 1,500 new apartments, according to data provided by economic consulting firm ECONorthwest. The city had issued developers permits to build an average of 4,600 new units per year in the preceding five years.
That drop is an indication that fewer constructions are surviving through the permit process and getting off the ground now. Equally alarming is a simultaneous decline in the number of new permit requests, which indicates that the city will see fewer apartments being built in the next several years, potentially setting Portland up for a housing crunch.
Developers filed requests to build more than 6,000 new apartment units in both 2016 and 2017 at the height of Portland’s building boom. In contrast, developers filed permit requests to build just over 2,600 units last year, nearly a third fewer than the year prior and less than half of what was requested during the peak years in 2016 and 2017, according to data from ECONorthwest.
Rising construction costs nationwide may be dampening building activity. Other cities saw declines in multifamily permitting activity last year, too, but the drop in Portland was particularly acute.
The number of multifamily permits issued declined 42% in Seattle, 26% in Salt Lake City and 23% in Denver, but rose 34% in Austin, 52% in Nashville and 89% in Sacramento, according to preliminary data from the U.S. Department of Housing and Urban Development.
Eric Cress saw a big opportunity for new housing when he moved to Portland in 2006. His company, Urban Development + Partners, responded by building apartment complexes along Division Street and in Northwest Portland in the years following the Great Recession.
Today, though, Cress’ firm has only one remaining mixed-use development underway in Portland and has no immediate plans to build any other apartments in the city.
“We won’t be delivering, other than that one property, any residential property in Portland in the next three years,” Cress said. “My hope is that changes because I live in inner Southeast Portland, my kids go to school here. I’d rather contribute to building the housing infrastructure within the state I live as opposed to working outside of Portland.”
Inclusionary zoning is the focus of developers’ concerns.
The policy requires that a percentage of new units be set aside for households making 80% of the median family income or below in developments with 20 or more residential units. The city, in turn, offers developers incentives to offset the cost of building those units, including allowing more density while waiving certain fees and taxes. Developments in the Central City and Gateway face stricter requirements, but greater incentives than those in other parts of the city.
But developers say those incentives haven’t done enough to offset the costs of including those affordable units and that the city dampened investment by implementing strict restrictions immediately rather than easing them in over time.
“Inclusionary zoning is the single largest factor in a suite of negative factors in Portland that are impacting development,” said Paul Del Vecchio, founding principal at Ethos Development.
Del Vecchio’s firm has continued building, nonetheless. He said his firm is going through the permit process on multiple projects right now and anticipates beginning construction on 379 units in Portland this year. He said it’s shocking that his small firm alone is developing a significant percentage of the units in Portland’s pipeline.
Del Vecchio said his firm can continue to develop in Portland because they rely mostly on investments from local individuals to fund projects. Large firms that work in multiple parts of the country and rely on investments from outside Portland can’t do that. If the return isn’t what they are looking for in Portland, he said out-of-state investors will simply invest elsewhere.
However, Portland Housing Bureau director Shannon Callahan said the inclusionary housing policy is working as intended.
Private developers have filed 121 permit applications for buildings large enough to trigger the mandate since the policy went into effect in February 2017, totaling 7,771 new residential units, including 951 rent-restricted units, according to the Portland Housing Bureau.
“When council was considering this policy in 2017, I had wondered to myself what would have happened and what our city would look like now if that policy had been in effect for the last 20 years,” Callahan said. “I think about the number of people I’ve seen displaced in Portland from the neighborhoods they’ve lived in for many years due to dramatic rent increases and an inability to find anything they could afford. There’s a lot of families that have an opportunity to now live in neighborhoods they would not have been able to without the policy.”
Callahan acknowledged that the inclusionary housing policy needs to be reviewed and potentially recalibrated periodically to ensure that it is working amid market realities.
The housing bureau has made several modifications to the policy since 2017, but had planned to hire an outside firm to conduct a full review of the mandate last year. The coronavirus pandemic prompted them to hold off. Callahan said they could revisit that review this year, if funding is available.
Yet, she said to blame the inclusionary zoning policy alone for the decline in multifamily permitting activity would be unfair.
“I’m not going to say there isn’t any impact from inclusionary housing,” Callahan said. “But I think to say that inclusionary housing is the reason for that decline is not factually accurate.”
An Oversaturated Market
Other factors have clearly contributed to the sharp decline in multifamily permitting activity.
Developers rushed to file permit requests to get in ahead of the inclusionary housing rules before they went into effect in February 2017. Those requests came at a time when Portland was already experiencing a building boom triggered by rising rent prices and an influx of people moving to the city.
That led to a building binge that helped moderate Portland rent increases over the last few years. The influx of new units coming on the market, coupled with the fallout from the pandemic, contributed to vacancy rates in Portland rising to 7% last year and 15% downtown, according to data from the analytics firm CoStar.
Many new buildings coming on the market over the last two years have had to offer concessions to attract renters, which have pushed rents down for those buildings. The vacancy rate was 34% for properties built in 2019 and 2020, according to CoStar.
Michael Wilkerson, senior economist with consulting firm ECONorthwest, said the building boom was inevitability going to be followed by a decrease in developments as rents leveled off and vacancies increased.
But he said that significant changes in policy, with Portland implementing its inclusionary zoning mandate and the state adopting its own limits on yearly rent increases, have led to a quicker dropoff that has only been exacerbated by the market conditions created by the pandemic and the bad national publicity Portland endured during last summer’s downtown protests. While planned construction has continued mostly unabated during the pandemic, the permitting process may have been impacted by slowdowns early on as city employees adjusted to working remotely.
“I don’t think (inclusionary zoning and limits on rent increases) were huge movers of the market, but when you add both of those two things on, particularly because they were calibrated in different market conditions than we’re seeing today, then you get this cumulative effect,” Wilkerson said. “Then, you get the pandemic, the recession, the reputational damage suffered in Portland and I think those accelerated those trends more.”
Developers also point to various other city fees and regulations as factors driving up the cost of building in Portland.
Del Vecchio said he had to return three times to the design commission to gain approval for a 73-unit apartment project in North Portland. He said the process led to only limited changes in the project, but created a costly four-month delay.
Cress, with Urban Development + Partners, said the Portland Bureau of Transportation claimed an additional two feet for sidewalks at a project his firm is developing in Southeast Portland, reducing the available density on the site. Other fees, like a construction excise tax on projects with improvements valued at $100,000, are contributing to the total cost of building as well.
A city audit released Tuesday found that Portland’s system for reviewing building permit applications is too slow and that efforts to address persistent concerns about the city’s complex regulatory environment have stalled as well.
Cress said there needs to be more coordination among different city departments to see how the combination of various policies are impacting the total cost of building.
The Housing Pipeline
The decline in multifamily permit activity in Portland doesn’t seem as precipitous when compared to the number of permit requests Portland was receiving five to 10 years ago.
Developers filed requests to build an average of 3,714 units per year from 2012 to 2015, according to ECONorthwest. That followed several years of limited permit activity due to the Great Recession.
But the lack of building at a time when Portland was gaining popularity and seeing an influx in new residents led to a major housing crunch.
The median asking rent in Portland jumped nearly 38% from 2010 to 2016, growing at nearly three times the national rate as median prices jumped from $838 to $1,153, according to the U.S. Census Bureau. That led to an apartment-building binge that finally enabled rent prices in Portland to begin to level off over the last few years.
The leveling off of rental prices and the increase in vacancy rates may seem like good news for renters now, but it could mask a looming crisis if people continue to flock to Portland and multifamily permit requests don’t pick up.
“The affordability in the short term is about as good as it’s been in several years,” said Nelson, of Capstone Partners. “But I also tend to believe that over the intermediate to long-term, people are still going to want to move to Portland and we’re going to be back to being a market that has a lot of demand and a challenge for new supply at an affordable price.”
Former Mayor Sam Adams, who returned to City Hall last month to help current Mayor Ted Wheeler implement his second-term agenda, told business owners earlier this month that he believes the city must attract $18 billion in private capital in the next 10 years just to make up half the housing shortfall.
And that will require Portland being attractive to big-money investors in the nation’s financial capitals.
“Most of the money that goes into building these housing projects, most of the money isn’t local,” Adams said. “It’s decided by people in New York and Los Angeles and Chicago and they decide among our sort of level of city. We compete against Sacramento, Boise, Austin, those types of cities and we have to be an attractive option for that private capital.”