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

By Roger K. Lewis
The Washington Post
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.

Yet even subsidies may not be a sufficient incentive for private developers. Many would just as soon avoid the hassles of complex financial subsidy programs and contentious rezoning hearings at which density and traffic congestion are hotly debated. Designing for residential diversity and marketing units to a socioeconomically heterogeneous clientele can be burdensome.

Until the 1970s, American voters and political leaders felt differently about housing. Citizens once seemed to understand that the real estate development industry could not satisfy the full range of housing needs. Consequently, local and state housing agencies, often with federal assistance, built or rebuilt housing for those who could not participate freely in the market. Diverse housing assistance programs supported construction of new or rehabilitated housing, whether developed by public housing agencies or by private, for-profit and nonprofit sponsors.

During the Nixon administration, feelings shifted. Some housing agencies and housing programs had been seriously mismanaged, and many badly designed and poorly operated housing projects had become dysfunctional. It became politically easy to question the entire assisted-housing enterprise.

The Nixon strategy was to introduce housing vouchers and let the private sector build all of the nation's housing. Thus the federal government's role would be simply to provide rent payment coupons to eligible tenants, who then could go out and competitively seek dwellings in the open market.

But the Reagan administration went further and extinguished any lingering feelings about proactive government initiatives or meaningful subsidy programs for affordable housing. Since the early 1980s, the issue of housing has steadily dimmed in the national consciousness and diminished as an item in the national budget. Likewise, assisted housing has been generally a low-priority item on the agendas of many state and local governments.

Could the Tysons Corner experience suggest that affordable housing may once again become a matter of serious public concern? To stimulate construction of affordable housing, might Fairfax County, one of the wealthiest jurisdictions in the nation, consider making developers an offer they can't refuse?

If the concern is real, and if the county wants to achieve its worthy housing and transportation aspirations at Tysons Corner, it will have to put its money where its mouth is. Otherwise, workers will continue to have no choice but to live ever farther away from where they work.

Roger K. Lewis is a practicing architect and a professor of architecture at the University of Maryland.