Today we submit for your consideration the following heresy:
The market-rate residential developments approved or proposed for Alameda aren’t going to solve the problem of the shortage of affordable housing in the City. In fact, if anything, they’re going to make the problem worse.
This is heresy, of course, because it runs directly counter to the credo espoused by the most dogmatic of Alameda’s Inner Ringers and the most rabid of our local housing advocates. Building more market-rate housing, they claim, is the best, if not the only, way to increase the supply of affordable housing and thereby eliminate the shortage.
But if you’re willing to risk expulsion from the society of the enlightened – the Merry-Go-Round was never invited to join – you might be interested in what the economists (rather than the ideologues) have to say about this issue. As it turns out, it’s quite a lot.
The bottom line is that, since market-rate residential development creates the need for more housing for very-low-, low- and moderate-income households, a new project will add to, rather reduce, the existing shortage of affordable housing unless the project itself supplies the necessary additional affordable units. And even if it does, the aggregate deficit is not likely to shrink significantly.
In fact, what’s true as a theoretical matter may be coming true as a practical matter in Alameda.
Here’s how we get to that conclusion:
More than a dozen cities in the Bay Area have adopted ordinances requiring market-rate residential developers to pay an “impact fee” intended to “mitigate” the effects of their projects on affordable housing. (The City of Alameda is not one of them.) This fee is used, among other things, to fund construction of new housing for very-low- and low-income households. Before a city can impose such a fee, state law requires it to prepare a so-called “Nexus study” analyzing the impact of new market-rate residential developments.
The premise of the Nexus studies is simple: The new residents in a market-rate development will need goods and services, like groceries and home repair. The demand for those goods and services will create new jobs. But many of those jobs won’t pay much, and the workers who perform them won’t earn enough to be able to afford market-rate housing. As a result, if these workers are going to live in the community where they work, they’ll need affordable housing. Otherwise, they’ll have to commute to their jobs – with all of the detrimental traffic and environmental consequences that entails.
The following diagram, taken from the Nexus study for the City of Albany, illustrates the concept:
Next comes the hard part: quantifying the impact. The methodology used by the different economic consulting firms preparing Nexus studies is pretty much the same:
- Estimate the household income distribution of the households purchasing or renting the new market-rate units.
- Estimate the consumer expenditures of those households.
- Estimate the number of new full-time employees required to provide the goods and services purchased by these households.
- Estimate the number of new households associated with this employment growth.
- Estimate the income distribution of these new employee households.
- Estimate the number of new households requiring affordable housing.
We’ll skip any extensive discussion of the tools used to derive these estimates – if you truly want to know more about the IMPLAN software model, we’ve attached the Nexus studies for the cities in Alameda County so you can read all about it – and get right to the results.
Typically, the studies calculate the need for additional affordable housing for a variety of development scenarios (e.g., town homes, condos and apartments), each of which is assumed to contain 100 units. For each scenario, the study shows the number of new housing units needed for the very-low- (0-50% of area median income), low- (51-80% of AMI), and moderate- (80-120% of AMI) income households whose members will perform the low-paying jobs needed to service the residents in the new market-rate developments.
Take Berkeley as an example.
In 2015, the Berkeley city council received a Nexus study assessing the need for additional affordable housing created by both a 100-unit condo project and a 100-unit apartment complex. Here are the tables showing the results (if they’re hard to read, click the Condo link for a larger version of the first table and the Apartment link for a larger version of the second):
The bottom line can be summarized this way:
- Every new market-rate condo development will generate a need for 13.1 new housing units for very-low-income households, 6.71 new units for low-income households, and 14.68 new units for moderate-income households per 100 units of new housing.
- Every new market-rate apartment complex will generate a need for 11.48 new housing units for very-low-income households, 5.88 new units for low-income households, and 12.86 new units for moderate-income households per 100 units of new housing.
Alameda, of course, is not Berkeley (at least not yet; we’ll wait to see who gets elected to Council in November), and it would be wrong to assert that the new residential developments here will result in exactly the same affordable-housing needs as those in Berkeley. In fact, it’s almost certain that the numbers would differ, since a Nexus study makes assumptions about sales prices and rents specific to the community being studied. Unfortunately, the City of Alameda hasn’t done any recent Nexus study of its own, so the data isn’t available that would allow more precise evaluation.
But we’re not going to give up so easily.
To get an idea of how much additional affordable housing the new market-rate residential developments in Alameda will make necessary, we took the data from the Nexus studies prepared for other Alameda County cites (except Oakland, whose analysis is not readily comparable to those done by the other cities) and computed an average of the new affordable units needed to support market-rate condo and apartment developments. We then compared these computed needs with the affordable housing actually provided – or promised – by the two large residential projects that Council already has approved.
The conclusion won’t make supporters of affordable housing smile.
First, the average number of additional units of affordable housing needed per 100 units of new housing:
|Very low income||Low income||Moderate income|
Then the local projects:
In November 2014, the lame-duck Council approved the Del Monte warehouse development (for which, as of today, construction hasn’t even commenced, much less been completed). The developer, Tim Lewis Communities, always has been coy about the mix of condos and apartments to be included in the 380-unit project, so we did the analysis both ways. A 100% condo project would create the need for 44 very-low-income units, 26 low-income units, and 19 moderate-income units. For a 100% apartment project, the corresponding numbers are 35, 21, and 16.
Tim Lewis will tell you that the Del Monte project provides 55 units of affordable housing, and that is true – but 31 of those units, comprising all of the very-low- and low-income units, are contained a separate building devoted to senior housing. Perhaps some of the folks aged 62 and older who will live in this building will take jobs selling yogurt or teaching yoga to the new residents of the renovated warehouse. But maybe not. And if they don’t, far from reducing the city-wide shortage of affordable housing, the Del Monte warehouse development actually will increase the need for very-low-income housing by 35-to-44 units and for low-income housing by 21-to-26 units.
The picture is only marginally better for the residential development approved by the current Council just a few weeks ago: the Alameda Marina.
The master plan prepared by the developer, Bay West Development, calls for 760 new housing units, of which at least half must be offered for sale. Applying the Alameda County averages to a 50/50 split between for-sale and rental units, the project would create the need for 79 very-low-income units, 47 low-income units, and 36 moderate-income units. But the master plan calls for only 33 and 26 units, respectively, in the two lowest-income categories. (It also includes 45 moderate-income units.) Thus, like the Del Monte warehouse, the Alameda Marina project won’t reduce the shortage of affordable housing in Alameda. To the contrary, it will increase the need for such housing by 46 very-low-income units and 21 low-income units.
(As a preview of coming events, we also crunched the numbers for the redesigned 589-unit Encinal Terminals project Tim Lewis is going to present to the Planning Board Monday. Based on the Alameda County averages, this project, depending on the condo/apartment mix, will worsen the city-wide affordable-housing shortage by 29-to-43 very-low-income units and 13-to-20 low-income units.)
The Nexus studies undermine the argument for market-rate residential development derived from what we’ve called the “movin’ on up” theory (and the housing economists call the “filtering” effect). The premise of this theory is that everyone wants a bigger and better place to live. New market-rate projects appeal to this longing, and, as renters and homeowners flock to the more expensive residences, apartments become available for lower-income renters. Or so it is claimed.
Even if this theory reflected an accurate reading of human nature – i.e., that we’re all little George Jeffersons – it will take a long time for the “filtering” effect to occur, and the benefits may not trickle down to those at the bottom of the income scale. Don’t take our word for it. As the definitive research brief published by the Institute for Governmental Studies at Berkeley states, “The filtering process can take generations, meaning that units may not filter at a rate that meets needs at the market’s peak, and the property may deteriorate too much to be habitable.” Moreover, “while filtering may eventually help lower rents decades later, these units may still not be affordable to low-income households.”
When Smashburger opens a new outlet to cater to the residents of the new waterfront developments in Alameda, we doubt that the employee behind the counter will take much comfort in the assurance that the movin’-on-up phenomenon ultimately will bring down housing costs: she needs an affordable apartment now – not decades from now.
During the meeting at which Council approved the Alameda Marina project, none of those on the dais, or at the podium, addressed these (presumably unintended) adverse consequences of market-rate residential development – except for Bill Smith, a long-time local housing activist and member of the Renewed Hope housing advocacy group. Before the meeting, Mr. Smith submitted a comment letter on the draft environmental impact report in which he urged the City to study the potential effects of new market-rate developments on affordable housing:
The Alameda Marina project together with proposed developments at the Del Monte Building and Encinal Terminals sites, would add about 1,500 market rate homes to the Buena Vista / Clement Avenue corridor.
These expensive market rate homes would induce hundreds of low wage jobs in Alameda, including for K-12 teachers, retail clerks, landscapers, home electricians, plumbers, handymen and many others. . . . [T]o find the adverse impact on housing to be less than significant, the Draft EIR must demonstrate that the ~100 affordable units proposed in the plan would be able to accommodate at least the number of low-wage workers required to provide the residents of the market rate and affordable homes in the development with a variety of services.
There is a reasonable expectation that despite the provision of ~100 affordable units, this market rate housing will have a significant adverse impact on the cost of housing in Alameda for low-wage workers and will force them to seek housing in surrounding cities. The Draft EIR ignores these workers and provides no basis for asserting that the impact on them would be less than significant.
The official response to Mr. Smith’s comment letter was not to deny the validity of his argument – but to state that the impact he identified was not an environmental impact meriting analysis in the EIR. Likewise, when Mr. Smith spoke at the Council meeting, no one on the dais took up his challenge to the conventional wisdom; instead, the Councilmembers hewed to the party line. Typical was Councilwoman Marilyn Ezzy Ashcraft: “I just want to see more housing, whatever we provide, whatever percentage of rental and for-sale, we’re going to help address the problem we have, make no mistake about it.”
Now for the application part of today’s sermon.
We suppose that those who reflexively oppose new residential development – and, frankly, we don’t believe there are as many zealots in this camp as in the opposing one – can take post facto gratification from the conclusion that market-rate residential projects may actually make the city-wide affordable-housing shortage worse. “See, we told you it was a bad idea!” they can gloat. But what’s done is done. And the risk of further harm from subsequent projects doesn’t give these folks any ammunition to use to shoot them down. As Assistant Community Development Director Andrew Thomas will be the first to tell you, the state Housing Accountability Act limits the grounds upon which a city can deny a residential development proposal – and exacerbation of the local affordable-housing problem isn’t one of them.
As we see it, a city that truly wants to remedy the affordable-housing shortage first must decide the extent to which it is willing to continue to rely on private developers. The analysis we’ve presented today suggests that the current system isn’t doing the job in Alameda, but perhaps it could be tweaked rather than trashed. Maybe the percentages of affordable units required by the inclusionary housing ordinance should be increased. Or maybe developers should be required to pay an affordable-housing impact fee in addition to including affordable units in their project. Sure, we recognize that either of these measures would increase a market-rate residential developer’s costs, but that doesn’t bother us, since it is the developers themselves who have made the problem worse.
The alternative is for the city to relegate private developers to the back seat and start driving the construction of affordable housing itself. Our regular readers know that this approach appeals to us, and from his public comments, it would seem Mr. Smith favors it as well.
“[O]ur existing housing policies are leading us to become ever more reliant on Oakland and other surrounding communities to house the new workers required to staff businesses that new market rate housing attracts to Alameda,” he told Council on April 3. “If we move Alameda to the head of the class for funding construction of affordable housing, we will be better positioned to attract and retain both residents and businesses.” More recently, he suggested that Council authorize a study of “social financing methods for affordable housing, including philanthropic, business or government (e.g. housing bonds).”
Pursuing either impact fees or government financing would require political will by current and future elected officials, since both might hit them where it hurts the most: their campaign accounts. The developers who fund PACs like “Alamedans United” won’t like the idea of seeing their costs go up. And the groups who promote candidates willing to hand over an ever-increasing share of City revenue will balk at diverting cash away from wages, benefits, and multi-million-dollar emergency operations centers. Forgive us for being cynical, but we don’t see our politicians relying for donations on the lower-income people whom affordable housing benefits.
But we may be wrong. We urge our readers to listen carefully to what the candidates say about housing issues this fall. If any of them starts touting market-rate residential development as the solution to the affordable-housing shortage – he’ll be the one leading the chants of “Build more housing now!” – well, you might consider voting for someone else.
Albany Nexus study: Albany Affordable Housing Nexus Study (December 2016)
Berkeley Nexus study: Berkeley Affordable Housing Nexus Study (March 2015)
Emeryville Nexus study: Emeryville Residential Nexus Study (March 2014)
Fremont Nexus study: Fremont Affordable Housing Nexus Study (October 2016)
Hayward Nexus study: Hayward Affordable Housing Nexus Study (October 2017)
Oakland Nexus study: Oakland Affordable Housing Impact Fee Nexus Study (March 2016)
Richmond Nexus study: Richmond Residential Nexus Study (July 2016)
San Ramon Nexus study: San Ramon Residential Nexus Study (March 2016)
Union City Nexus study: Union City Affordable Housing Nexus Study (September 2016)
Del Monte warehouse: 2014-12-16 Ordinance – Del Monte Master Plan-redline
Alameda Marina: 2018-07-10 staff report
Encinal Terminals: 2018-07-23 staff report to PB
Bill Smith comment letter: Bill Smith comment letter to DEIR
IGS research brief: Berkeley IGS research brief re subsidized & market-rate housing