To dig out of the state’s deep shortage of homes and control the crisis of high prices and rents, Washington legislators have passed a slew of bills in the past two years to boost housing production, including the re-legalization of accessory dwellings, middle housing, and co-living homes. But for two years running, the legislature has reached an impasse on a remaining zoning reform that’s critical for curbing sprawl, cutting pollution, and making Washington communities affordable for all incomes: legalizing apartments near transit.
Known as transit-oriented development, or TOD, allowing lots more homes in apartment buildings where employment and transportation choices are abundant would make the most of public investments in transit and give people of all incomes more affordable options to live closer to their jobs, schools, and other neighborhood amenities. This in turn brings compounding benefits for local economies, the environment, and housing equity.
TOD has the potential to yield the high quantity of new homes needed to remedy the state’s massive housing shortage. It can help reverse the historic pattern of exclusion in land use that’s walled off our cities’ middle income and low-wage community members. It’s the most effective way to create low-carbon cities and towns. And it’s an essential formula for preventing sprawling development into Washington’s farmland and forests.
TOD is also popular. Statewide polling by Sightline in 2023 found that 82 percent of Washington voters—east, west, rural, urban, and suburban—support allowing more kinds of housing, including taller apartment buildings, near frequent bus and rail stops.
Getting past the TOD impasse
But while reforms have opened up formerly sacrosanct single-detached zoning to middle housing throughout most of Cascadia, only British Columbia has passed strong TOD legislation. It’s the same story in the rest of North America: middle housing wins have been piling up, but only Massachusetts and Colorado have managed to get TOD bills through.
Middle housing reforms have passed with the support of unusual multisector bipartisan bedfellows, but those coalitions tend to scatter when it comes to legalizing large-scale apartment buildings. In particular, left and center legislators often deadlock over the question of whether statewide zoning changes to allow apartments should be coupled with statewide mandates for inclusionary zoning (IZ), the requirement that new apartment buildings offer a share of homes at reduced rents that are affordable to residents with incomes below a certain threshold.
Most lawmakers and advocates agree on the goal of creating mixed-income neighborhoods in transit-rich, job-rich cities that provide affordable housing options with good access to transit. And the intent of IZ is to attain that goal. Unfortunately, the IZ as proposed in Washington’s 2023 and 2024 TOD bills would go against the broadly shared vision of connected transit communities with housing choices for people of all incomes—it would do more harm than good.
The inherent problem with unfunded IZ is that its cost impedes the production of housing. It’s a preventative tax on housing when what we need for affordability is far more housing. Sometimes, when market conditions are just right, that tradeoff can be worth it—if it yields some affordable homes and doesn’t reduce the overall supply by much. But in many cases, IZ backfires entirely, thwarting the construction of both market-rate homes and income-restricted homes.
The IZ in Washington’s TOD bills was a formula for serious statewide backfire, especially in communities already struggling to attract homebuilding. Moreover, because the legislation targets IZ in TOD areas and not elsewhere, the extra burden of IZ would drive new housing construction away from transit. Flawed IZ would sabotage the state’s goals of shared access to transit and low-carbon communities.
Apartments near transit is a top priority for Sightline. But we can’t risk legislation that takes us backward. Below, I describe five flaws that would result in Washington’s 2023 and 2024 TOD bills doing more harm than good—flaws that are also found in IZ plans across Cascadia and beyond. The first flaw is inherent to all unfunded IZ, and the following four are policy design failures specific to the IZ as proposed in Washington’s TOD legislation to date.
But this doesn’t mean there’s no path for TOD and IZ! Washington can have abundant apartments and income-restricted affordable homes near transit. In a follow-up, I’ll delve into a promising solution to both the politics and policy: community-funded IZ. Funded IZ could unite the left and center and deliver connected mixed-income neighborhoods with ample apartment homes near transit in Washington.
(A teaser: Like standard IZ, funded IZ is a mandate for the inclusion of income-restricted homes but with a key difference: public funds pay for the discounts to low-income renters. For example, Portland funds its IZ program by granting a property tax exemption and fee reductions that match the rent revenue lost on the required affordable homes. If fully funded in this way, IZ doesn’t suppress homebuilding. The result is a win-win: more subsidized homes and more homes overall.)
1. Unfunded inclusionary zoning worsens the housing shortage
The core reason why homes have become increasingly unaffordable is that there’s a shortage of them. The housing shortage has hit communities large and small throughout Washington and across North America. For decades we have simply failed to construct enough housing. The only way to remedy that is to build more, lots and lots more homes of all shapes and sizes, and above all—in a climate- threatened world—more apartments.
In North America, as in most of the world, the private sector overwhelmingly dominates homebuilding. Public and nonprofit subsidized housing is essential for meeting the needs of lower-income residents, but because private developers build well over 90 percent of dwellings, ending the shortage will never happen without their full participation.
The go/no-go decision on constructing every single private dwelling boils down to whether the value of what can be built is greater than the cost to build it. Almost all builders rely on investors and banks to finance construction, and those lenders will not grant loans unless they are confident that the finished project will be valuable enough for the builder to pay them back.
The determinant of an apartment building’s value is how much rental income it can generate. An IZ mandate for the owner to cut the building’s income by offering apartments at below-market rents lowers the building’s rental income and therefore reduces its value. And that loss of value makes it less likely that anyone will build it. This is the fundamental, immutable flaw of IZ: all else equal, it reduces the amount of housing built.
In cities where there’s demand for housing, any squeeze on supply caused by IZ will drive up average market rents until they can compensate for the rent revenue lost on the IZ units, at which point construction again becomes viable. The end effect may be higher rents rather than less housing. Unfunded IZ runs up against the unavoidable rule that the price of existing homes depends on the cost of building new homes.
It’s easy for policymakers to overlook unfunded IZ’s inherent flaw—that it impedes construction—because all else is rarely equal in the real world. Academic studies of IZ have a hard time sifting through differences in policy design, the vast complexity of cities and regions, and the numerous fluid variables involved in housing production to reach definitive conclusions. But on net the empirical evidence points to the conclusion that IZ increases rents.
Perhaps more important, IZ’s impact on homebuilding works like a dimmer, not a switch. There are usually some projects profitable enough to overcome IZ’s financial burden, and those examples tend to dominate political discourse, bolstering support for IZ. But for every IZ success story of a new subsidized apartment, there are far more “ghost homes”—apartments not built and families not housed because IZ made builders walk away. Ribbon cuttings at new buildings create headlines but ghosts are invisible.
Researchers at UCLA recently published a study illustrating the levels of housing loss that IZ can cause. Their model estimates that in Los Angeles, IZ requiring an 11 percent set aside of affordable units reduces the production of homes by 28 percent. For every below-market rate home gained through IZ, 4.5 market-rate homes are lost. In other words, creating 1 affordable home through IZ makes the housing shortage 4.5 homes worse than it would have been without IZ.
Holding back the construction of market-rate homes worsens affordability for everyone, and harms those with the least, the most
If IZ exacerbates the housing shortage by impeding homebuilding, average rents and prices go up. A growing body of empirical research shows that constructing market-rate homes reduces rents not only regionally but also within a neighborhood. These rent reductions mean that fewer low-income people need a subsidy to afford housing, and one study estimated that if Los Angeles built housing as fast as the 90th percentile metropolitan area for ten years, it would save $353 million on Section 8 vouchers annually.
Studies have also documented how people moving into new housing open up lower-cost housing options nearby, with one study concluding that “new market-rate construction loosens the housing market in middle- and low-income areas even in the short run. Market-rate supply is likely to improve affordability…and to benefit low-income people.”
A landmark study of homelessness in US cities showed that the benefits of creating abundant housing can extend even to those with the most limited resources. Researchers found that by far the strongest correlates to homelessness rates are high rents and low vacancy rates—the two signature indicators of a housing shortage.
These new studies document how the housing market works like a game of musical chairs. When IZ reduces the number of “chairs”—that is, homes—it’s the poorest members of the community who end up without one. Now recall the UCLA estimate cited above that even a relatively modest IZ mandate prevents the construction of 4.5 new market-rate homes for every 1 affordable home it creates. One secure chair gained comes at the cost of several lost, exacerbating housing instability and homelessness when the music stops.
IZ is like raising Peter’s rent to pay Paul’s—and to make landlords richer
The UCLA study also evaluates the tradeoff between the benefit of reduced rents in the apartments required by IZ on the one hand, and the negative impact of raised rents for everybody else on the other. For the 11 percent IZ scenario, the sum of the savings that accrue to renters in the subsidized units would be negated by the sum of the extra paid by market-rate renters if average rents citywide increased by just 0.6 percent annually. In other words, if IZ eliminates enough homes to cause average rents in Los Angeles to rise by 0.6 percent, IZ becomes a wash in terms of what all renters lose and gain financially.
Here’s a back-of-the-envelope approximation of IZ’s effect on average rents: Economists estimate that in typical cities, a 1 percent decrease in housing stock causes a 1.5 to 2.5 percent rise in prices (a metric called elasticity). Los Angeles currently has 1.57 million homes. The UCLA study estimates that 11 percent IZ would reduce the city’s housing supply by an average of 10,980 units per year—a loss of 0.7 percent. Applying the midrange elasticity of 2.0, that loss of supply would jack up citywide average rent by 1.4 percent.
This means that collectively, LA’s market-rate renters would pay extra rent equivalent to more than two times the rent saved by all the tenants in the IZ units. And private-market apartment landlords would collect the gravy of the difference. Said another way, if LA ditched IZ and instead charged all market-rate renters a fee large enough to provide the same subsidy to IZ-qualified tenants, the fee would be half as much as the rent hike that would have been caused by IZ.
2. Imposing IZ near transit but not elsewhere will incentivize homebuilding farther from transit
Washington’s TOD bills would have required cities to implement IZ near transit but not anywhere else. In most cities, this would have created small islands of land encumbered by IZ’s homebuilding penalty surrounded by land not so encumbered. IZ is inherently problematic when it is geographically targeted like that, because it makes construction more financially feasible outside the IZ areas than inside them. If homebuilders can find similarly zoned land that’s not subject to IZ—in the neighborhood, the city, the region, or even the country—they will likely build there instead.
A recent study of Seattle documented this IZ avoidance, finding “strong evidence of developers strategically siting projects away from MHA [Mandatory Housing Affordability]-zoned plots—despite their upzoning—and instead to nearby blocks and parcels not subject to the program’s affordability requirements.”
For the case of IZ targeted around transit, the stakes are that much higher because of the vast array of benefits that come with creating more homes in these strategic locations. It’s a targeted penalty on homebuilding in the very places that are best for abundant mixed-income, workforce apartments: close to transit with good access to jobs. By imposing a burden that pushes apartment construction away from transit station areas, IZ subverts the central purpose of TOD legislation to make the most of the state’s big transit investments.
3. Coupling IZ to upzones for “value capture” is taking one step forward and one step back
The upshot of the available research is that IZ may not achieve any net benefit for affordability, and it could actually make things worse. To lower that risk, some policies couple IZ with “offsets” that compensate for the financial hit caused by IZ. By adding value to what can be built, offsets reduce the chilling effect IZ has on construction.
Washington law takes a small step toward rectifying IZ’s self-defeating tendency by authorizing IZ only if cities also adopt offsetting “incentive programs.” The law does not, however, require the offset to cover all the lost value, and if the offset doesn’t, IZ still impedes homebuilding. A running joke among planners is that by the letter of the law, granting a cheeseburger would be enough.
What’s more, the type of offset makes all the difference. The ideal offset fully pays for IZ with public dollars, as Portland’s community-funded IZ program does. In contrast, some offsets condition beneficial zoning reforms on the adoption of IZ (a counterproductive practice known as pretextual planning). In the United States, one common instance is coupling IZ to upzones—allowances for bigger, taller buildings—which boost the value of what can be constructed. Washington’s prominent example is Seattle’s IZ program, known as Mandatory Housing Affordability (MHA). In Washington’s TOD legislation proposed to date (excepting the 2023 bill before it was amended), legislators likewise linked IZ to the apartment upzones near transit.
Offsetting IZ with upzones is seductive to officials because upzoning is virtually free. The only cost to municipal budgets is the relatively small expense of planning. Moreover, some policymakers, particularly those on the left, believe that upzones should never be granted unless they are coupled with affordability mandates; that is, these policymakers are committed to a concept known as “value capture.”
The idea is that upzoning land makes it more valuable, awarding an unearned windfall to landowners. The public can take that windfall back by requiring developers to subsidize some of their new apartments. It sounds reasonable, but on closer examination, it isn’t.
Upzones do increase land value. And because the value of land is derived in part from the value of the community and public investments around it, it’s justifiable for governments to capture some of that unearned wealth and use it for public benefit. In fact, Washington already has a tax that does that: the property tax. (An even better way to capture land value is with a land value tax, but Washington’s Constitution prohibits it.)
Value capture of upzones is regressive
The purpose of upzoning during a housing shortage is to create more homes. That’s why you do it. Capturing the value of the upzone by imposing IZ, however, is like two rowers facing opposite directions on the same boat.
Yes, some larger new apartment buildings will likely get constructed, and they’ll have some affordable homes in them. But other new apartments will remain on the drawing board because their value, if built, would be lower than what it costs to build them. They will not house anyone. They will not alleviate the housing shortage. They will not help moderate rent. But fewer dwellings, forgone taxes, and higher prices and rents are costs that don’t appear in city or state budgets, so they’re not the squeakiest wheels for policymakers.
Moreover, unlike a property tax, IZ is a narrow tax that applies only to the small fraction of properties in a city that get redeveloped into housing. IZ is a targeted penalty on the very activity—adding homes—that would help relieve the shortage and lower prices and rents for everyone. Meanwhile, IZ captures zero value from the vast majority of owners who are not adding homes to their properties and adding to community housing supply but instead just sitting back and watching their property values appreciate thanks to the shortage.
By fixating on value capture and trying to prevent potential windfalls to a tiny minority who are actually helping to relieve the shortage, policymakers instead lavish windfalls on all those fortunate enough to own a home, and also on landlords who can charge higher rents when housing remains scarce. Those who don’t own their homes (tenants and first-time buyers) get slapped with the opposite of a windfall: higher rents and prices.
4. A one-size-fits-all IZ requirement selectively impedes homebuilding in lower-income communities
Elevating IZ policy to the statewide level can create more problems. A major flaw in Washington’s TOD bills was the uniform IZ requirement for the entire state. It set a blanket mandate that any housing development within a transit station area set aside 10 percent of homes as affordable to households earning up to 60 percent of area median income (AMI).
A fundamental characteristic of IZ is that the degree to which it suppresses homebuilding is highly dependent on the strength of the local real estate market—that is, the typical rents and prices in a community. And real estate markets vary enormously across Washington State, regionally and even within cities. Multiple academic studies have concluded that the weaker the market, the more downward pressure IZ places on housing construction.
Even staunch IZ advocates such as Grounded Solutions Network acknowledge that “inclusionary housing does not make sense in every community.” What that means in practice is that in lower-cost Washington cities such as Everett that have been struggling to attract apartment construction, IZ would push it even further out of the realm of possibility. The unintended consequence of Washington’s TOD bill would have been to disproportionately slow homebuilding in less wealthy communities throughout the state.
Minimizing IZ’s damage requires allowing local flexibility
The financial feasibility of housing development is highly sensitive to the expected amount of rent generated by the finished homes. Small increases in IZ can easily render projects infeasible.
The city of Federal Way, for example, recently reduced its IZ set-aside requirement from 5 percent to 4 percent of units at 50 percent AMI in response to concerns that the overly onerous mandate was impeding the development of much-needed new housing. City officials realized that four percent of something is better than five percent of nothing.
A standard tool for setting IZ rates to maximize benefits (affordable homes) and minimize unintended consequences (suppressing homebuilding) is a feasibility study. These studies examine the effect IZ is likely to have on development in a unique local market. They aim to at least minimize the damage by avoiding requirements that kill off homebuilding entirely. Because 10 percent of zero is zero.
The problem is that, by definition, a localized IZ study is impossible at the statewide level. In fact, Seattle’s feasibility study for its MHA program found that even within the city there was enough variation in market strength that in areas with weaker markets, MHA would quash apartment construction.
This unavoidable localized dependence is why no US state has ever enacted statewide one-size-fits all IZ. Colorado, for example, this year passed a TOD bill that lets local governments decide whether they want to impose IZ, and if they do, what the requirements should be. As originally introduced, Washington’s 2023 TOD bill did the same. There is no Band-Aid for a uniform statewide IZ mandate. The only solution is to not do it and to give local officials flexibility to tailor their IZ decisions to fit their local needs.
5. Washington’s TOD bills would have created a haphazard patchwork of IZ and property value distortion across the state
Washington’s TOD legislation had two quirks that would have spawned even more of a policy mess. First, it exempted property already subject to an IZ program (presumably to avoid political battles with cities, especially Seattle). Second, it exempted any property that was already zoned for at least as much capacity as the bill required (presumably to avoid legal conflict, as state law doesn’t allow IZ without an offset). These two exemptions would have led to bizarre uncoordinated variations in IZ requirements between cities, within cities, and even within individual transit station areas.
The 2023 and 2024 TOD bills both proposed one-size-fits-all IZ requirements much higher than MHA almost everywhere in Seattle (where it varies by location). So, for example, the area of the Sounder commuter rail station in the city of Kent, located in a relatively low-cost community within transit commute of Seattle job opportunities, would have gotten saddled with IZ more than twice as demanding as the IZ in downtown Seattle, one of the state’s most expensive markets.
Or take Redmond, one of the state’s wealthiest suburbs; it could keep its existing light-rail station IZ policy, which mandates less affordability than the state bills would have. Or take Lynwood, a less expensive city that could remain IZ-free at its light-rail station because it’s already zoned above the legislation’s requirement. Or consider that a bus rapid transit (BRT) stop area on Highway 99 in Everett would have a higher affordability mandate than a BRT stop in Seattle’s pricey Ballard neighborhood.
Under both bills’ rules, even within a single station area, certain parcels would have no IZ at all because they didn’t have to be upzoned to comply with the bill, while adjacent parcels would be burdened with IZ because they did have to be upzoned.
Recently constructed apartments near Redmond’s future Link light rail station, ranging from six to eight stories.
Fairly capturing the value of upzones using IZ is a policy unicorn
Compounding this IZ inconsistency, the TOD bills also would have had wildly divergent effects on property values, even in areas where the IZ was consistent. Because existing zoning can vary widely, the amount of upzoning necessary to convert existing zoning to the legislation’s required zoning also varies widely. That translates to big differences in value generated among different parcels. For some properties, the upzone might offset the financial burden of the IZ, but in others it might not even come close.
This is an unavoidable defect with policies that attempt to capture the value of upzoning, because in the real world, the value of an upzone can be all over the map. It cannot be done fairly unless the capture mechanism can be adjusted to match the location-specific value created. If the mechanism is IZ, that means varied affordability requirements, except that creates another problem: the IZ avoidance effect, where some properties arbitrarily become more feasible for homebuilding than others (see #2 above). Now imagine how much messier things could get if a city wants to further upzone some part of an area that already has IZ from a previous upzone (hello, Seattle!).
On top of all that, the TOD bills incorporate another property value inconsistency. They mandate two levels of upzones: a bigger one for light-rail stations and a smaller one for BRT. But in either case, the IZ requirement is the same. Consequently, compared with parcels near light-rail, parcels near BRT get a less valuable offset, so IZ has a stronger chilling effect on homebuilding there.
All the ways in which Washington’s TOD legislation would have a haphazard impact on property values could make the enacted law vulnerable to a legal challenge. (Teaser #2: Funded IZ totally sidesteps the dysfunctional policy cluster caused by coupling IZ to upzones.)
There is a better way!
Crafting state legislation for apartments near transit while ensuring mixed-income communities with built-in below-market affordability is no small task. Washington’s TOD bill was a complicated beast, and it takes a lot of unpacking to appreciate its problems. Lawmakers had the right intentions for putting IZ into the bill, but as the analysis above demonstrates, the backfire effects of IZ coupled with particular complications and unintended consequences in the policy design would result in the bill doing more harm than good.
To summarize:
- Unfunded IZ is inherently at odds with its own intent to increase affordability.
- Targeting IZ to transit station areas pushes homebuilding away from transit.
- Capturing value by linking IZ to upzones is taking one step forward and one step back.
- A statewide uniform IZ requirement deprives less expensive cities of both new market-rate rentals and below-market rentals.
- The TOD bills’ exemptions would create an erratic mess of varying IZ requirements, upzones, and land-value windfalls in different places.
Washingtonians need legislators to get this right. With last year’s passage of bills legalizing middle housing and accessory dwellings, allowing apartment buildings around the state’s biggest transit investments is critical unfinished business. It is well worth the time and effort to craft a bill that can deliver on the full affordability, equity, and sustainability potential of TOD.
Fortunately there is a promising solution: community-funded IZ. Funded IZ would eliminate most of the problems documented above while still guaranteeing that transit-oriented communities create affordable housing as they grow. I’ll dig into that solution next time.
