A Workable Solution for Affordable Housing

I have been working on a new playbook for Affordable Housing. I've drafted, edited, scrapped, started over, and redrafted several dozen times. The message wasn't quite perfect. But when one of the two Presidential candidates announces a national commitment to addressing Housing Affordability during their Convention Speech, its time to stop editing and unveil what can work and what cannot work.

The definition of "workable" is paramount here. A workable solution is beneficial to almost everybody so that they have sufficient motivation to push for adoption. Some people will be disappointed and they will need additional motivation. Housing, specifically multifamily housing, is a nebulous industry with many disparate parties doing their level best. These disparate parties are often put at odds--a workable solution finds a path forward that is advantageous to the majority. Specifically, within multifamily real estate there are existing land owners, developers, financiers, contractors, subcontractors, elected officials, government employees, and neighbors. Our housing affordability crisis exists because almost every proposal is detrimental (and perhaps even catastrophic) to one of these vested interests. Unfortunately, most policy proposals don't get off the ground because they are "unworkable"--and our affordability exacerbates.

There are a number of proposals out there, but many of them are government subsidized development. Unfortunately, the balance sheets of our public sectors do not allow for easy political adoption of large infrastructure outlays...while I am politically aligned with these concepts, they are not politically workable--and certainly not scalable. Perhaps most disheartening, they appear to actually drive affordability lower as a result. Even creative financing is a form of government subsidization. And when you cross out government subsidy, you can also cross out government subsidies for the finance side, building materials, and taxes associated with development. Because of the financial bed we have made with our public sector balance sheets, we're resigned to building the housing that we need at scale using private sector investment.

Therein, in order to build the housing that we need at scale (to boost the supply to equilibrium levels), a workable solution has to include healthy returns for private sector investors to draw in dry powder. Thus, whenever I hear a political candidate propose policies to address affordable housing, I am dismissive of any policies that do not encourage private investment in scalable housing solutions.

There is a repeatable playbook that municipalities can use to boost the returns on private sector affordable housing. The municipalities that have the courage to change their regulatory environment will have the added benefit of additional blue collar construction jobs, more housing, more affordable housing, and urban vibrancy.

The Muncipal Playbook for Affordable Private Sector Housing

At the top of the list of private sector affordable housing initiatives is broad adoption of smaller footprint housing solutions. Many municipalities are dismissive of smaller footprint for fear that the lower price point (which is not that much lower) is going to change the dynamic of the neighborhood in an undesirable way. In our experience, the smaller footprint apartments simply create a housing product for younger generations who actively seek a smaller footprint. Many urban planners and elected officials are guilty of assuming that a smaller footprint housing option is "undesirable", because it does not fit their worldview. Younger generations are drawn to a housing option that is environmentally friendly (walk to work, small footprint). Upzoning is essential as well. However, it will come at a cost. It should be part of the solution, but is not an independent panacea.

These solutions have been discussed by many experts. However, there is another solution hiding in plain sight. What many policy experts have not considered is the impacts that soft costs have on development. Many have looked at "how can we source the materials cheaper" or "how can we force people to uplevel", but not many have looked at "how can we make it easier for people to build this housing?" This, may be the panacea, capable of creating the necessary housing at scale.

The municipalities that want to create affordable housing at scale will be the municipalities that prioritize multifamily housing and work in partnership with developers to build them. One of the first things the development community would tell the municipalities would be: "I don't want to hope to get my permits". Certain municipalities, like Los Angeles, have created pre-approved and expedited permits. By expediting (and guaranteeing) that permits will be received in a few weeks (instead of years), this policy change alone can change the capital stack of a development, and save several hundred thousands of dollars of debt service--therein juicing the IRR to the investors a few basis points. By shaving 2 years (and certainty) on the permitting process, the municipality has moved their housing investments to the top of the investment heap.

We can go further, too. If an "area" (intentionally in quotes) decides to follow our "regional development organization (RDO)" model, they can work together on the same permitting pre-approvals to span geographies. One of the biggest challenges that developers have is that their ability to work with regulators and planners in one geography is wholly different than across the street, which is a new municipality. In Los Angeles County, there are 88 different municipalities. This is 88 different building codes (all of them complex) and 88 different processes to get permits. It is simply too risky to start over. By creating an RDO, municipalities understand that "even though I live in Culver City, I'm still part of the greater LA Basin."

To the point above, all of the municipalities have created a nebulous set of rules and regulations for housing--which were necessary at the time. However, many of these policies are legacy policies and should be actively reconsidered. They should be evaluated using a policy framework that we call "outcomes based regulative assessment" (OBRA). The purpose of an OBRA is to evaluate each policy to determine if these policies create an environment that is detrimental to quality of life for their citizens. The primary purview that we use in this analysis is to answer the fundamental question: can people that work in grocery stores in this neighborhood afford to live here as well? If the answer is no, this community is deemed to be unhealthy from an outcomes-based regulatory assessment. Therefore, the quality of life in this community is not as strong as it could be. If people cannot afford to live there, the risk that people will create financial means within the gray economy start to rise. The longer a community goes without being able to provide housing for their service workers, the worse the community's quality of life gets. The outcomes based regulative assessment is based on working with the RDO based on the parameters that this community values in its quality of life. The fundamental question of "can service employees live here" is just one outcome--we work with municipalities to understand their threshold for crime, education, etc... Whenever an RDO is deemed to not meet its success standard, we build a proactive remediation plan to get them back to where they want to be.

The path to affordable housing is baked within the RDO and OBRA methodology. Its a statement by a community that "where we live is not up to our standard" and its a rallying cry that this community values their neighbors and wants them to live as part of their community. When we talk about affordable housing for all--I think we're really talking about quality of life for all--and we are here to answer that rallying cry.