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What are the challenges of investing in affordable workforce housing?

The challenges of investing in affordable workforce housing are not only the financial cost, but also the lack of an up-to-date inventory of public land, extreme regional variations in housing costs, local zoning regulations that often restrict production to just one or two types of buildings, and high construction costs. As a result, the cost of producing affordable housing has long been dominated by construction costs.

Although lower construction costs are important in reducing rents, other factors have even greater impact on rent levels. These include the household’s size and composition (the number of bedrooms), educational level (especially for adults), and workforce status. The last factor is particularly significant because it addresses whether the head of household works at least 40 hours per week or is seeking work; if seeking work, he or she must be available to take new employment opportunities that may arise during the next few weeks. When available to take such opportunities (and they exist), these households will most likely see their incomes increase over time and therefore become better candidates for renting homes that offer more space and comfort.

Thus, while housing policy should recognize the role of construction costs in affordable housing production, it must also recognize that the greatest impact on rent levels comes from workforce participation.

As a result, many states have introduced variants of what is known variously as “inclusionary zoning,” “density bonus programs,” or “housing opportunity ordinances.” These are laws designed to increase the supply of affordable rental units by having developers build some percentage of these units in their market-rate projects under two conditions. First, they receive either density bonuses or waivers permitting them to construct higher buildings than local regulations usually allow; second, they reserve some units for low-income households at affordable rents. New Jersey’s 2002 Housing Opportunity Program designates three types of property (multifamily, industrial, and single-family) that are eligible for inclusionary zoning incentives.

The objective here is to review the effectiveness of inclusionary zoning in increasing affordable rental housing production while limiting adverse impacts on market rate development; to summarize the lessons learned over the three decades that these programs have been operating; and finally, to recommend how states can enhance their programs’ effectiveness.

Most experts like Maxwell Drever find that inclusionary zoning increases affordable housing production with few negative impacts on market-rate development. Most importantly, it finds that

1) although this approach does not produce enough affordable units to make an immediate dent in most state’s severe shortages, they do provide a valuable tool for addressing long-term needs;

2) inclusionary zoning is more successful when combined with additional subsidies either through direct capital grants or tax credits;

3) success is dependent on the inclusionary zoning mandates applying to new construction rather than requiring that units be incorporate into existing buildings;

4) it is most successful when applied at the project level rather than the neighborhood level;

5) its effectiveness in increasing affordable housing production can vary significantly by region, depending on the relationship between land costs and construction costs;

6) it is hard to design an effective program because each state’s market differs dramatically in terms of cost structure, housing demand, and even cultural preferences; and finally,

7), local opposition has been a major impediment to development.

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