Unintended Consequences From Land Use Laws and Government Bureaucracy
by Brian M. Owendoff
The Portland apartment market was recently ranked by the U.S. Census Bureau as the tightest in the nation. The overall Greater Portland Market has an occupancy rate of 97%, with some submarkets at 100% occupancy. Portland had the lowest vacancy of 75 metropolitan areas tracked by the Government.
Over the past twenty years, Portland has averaged approximately 4,000 new apartment units a year. 2010 saw the delivery of less than 600 units. Approximately 1,500 units will be delivered in 2011. There is currently a shortfall of 10,000-12,000 units.
Portland’s high occupancy has three main causes:
- Oregon’s Land Use Laws & costly and time consuming entitlement for new construction restricts supply and increases cost for construction
- Increases in renter demand from demographics & challenges associated with securing a home mortgage
- Rate of new construction at its lowest levels due to challenges in securing construction loans.
Oregon Land Use Laws and Municipal Entitlements
While our land use laws have done more good than harm, the implementation of the onerous laws to block most new development is hurting our State. Lack of shovel ready land, entitlement processes two to three times longer than other parts of the country, and the ability for any group to block a project with little or no money and no standing makes Oregon a “banana republic” an acronym meaning: “Build Absolutely Nothing Anywhere Near Anyone”.
While I do not like suburban sprawl like you see in cities like Dallas, Houston and Atlanta, our land use laws are having the unintended consequence of hindering our ability to attract new companies to Oregon, driving housing costs for every economic level to unnecessary high levels and is a factor in Oregon’s continued unemployment levels above the national average.
Oregon has the nation’s most restrictive land-use regulatory system. Every square inch of Oregon has been zoned by government planners, with the result that development of any type is prohibited on most private land. In addition, over 60% of Oregon’s total land mass is owned by the government, so there are relatively few parts of the state where real estate markets can function effectively. The result is a government-enforced cartel of landowners who own buildable land. The consequence of any cartel is to drive up the price of the regulated good to above-market levels. The high cost of land in Oregon is one reason why the price of housing is relatively high in Oregon’s largest cities. This is directly causing apartment rents to rise faster than other parts of the country.
While it is often lauded by its proponents as a “model” for the nation, after 38 years no other state has chosen to emulate Oregon’s land-use program. Clearly the Oregon system is more of an aberration than a model, and needs to be reformed to incorporate the benefits of property rights, incentives, and markets.
We have a 1970s land system for a 21st century economy. The Stone Age did not end because they ran out of stones. It ended because something better came along.
Demographics & Challenges Securing a Home Loan
Greater Portland continues to attract a high number of generation ‘Y’ that wants to rent apartments in the urban core. Almost 10,000 continue to move in by the Prius load each year.
Additionally, 10,000 boomers are turning 65 years old every day. Many boomers are downsizing and selling homes to move into smaller living spaces. Portland is attracting retirees that also want to live in an urban core. Many are choosing the flexibility of renting an apartment vs. the risk of ownership of a condominium.
While at the height of the home buying frenzy of 2002-2008, many buyers could purchase with little or no equity. Today, twenty percent down payment is standard. Higher down payment requirements with higher lending standards results in less people being qualified for home loans. This has the result of forcing more people to be renters for a longer period of time.
Lack of Construction Financing for New Apartments
When I lead the Opus Northwest team in the delivery of 433 apartment units in downtown Portland in 2009 (Ladd Tower and Park19), a construction loan only required ten percent equity. Since the financial meltdown in September 2008, the equity requirement has grown to almost fifty percent. Limited equity and banks unwilling or unable to provide construction loans due to pending Federal Government “stress tests” on their balance sheets brought new construction to a screeching halt. Portland currently has a shortfall of over 10,000 new apartment units at all pricing points across both urban and suburban markets.
In the past 60 days, several banks have been more willing to provide construction loans for new apartment construction, including equity requirements as low as twenty percent for conservatively underwritten projects in prime locations.
Possible Solutions and How to Get Out of Stone Age
Even if 10,000 new units broke ground in the spring of 2012, this new product would not be delivered until 2013-2014.
Near term, rents will increase from 10-30%. Free rent and free underground parking will be non-existent. Landlords will not spend any money on marketing, as the demand will far outpace supply. Landlords will be shooting “fish in a barrel”.
The tight apartment market will regrettably impact the elderly and lower income renter to a greater extent than middle-income residents, as they will have fewer options for housing. The unintended consequence will result in increased demand for subsidized housing and increased homelessness in Portland. Our land use laws and stringent entitlements drive up construction costs making housing more expensive here than in other parts of the country.
Moving forward, Cities that can expedite the approval process for new construction, waive and/or reduce system development and other charges and potentially think “out of the box” with approval new construction methods that could result in lower construction costs that could better meet market demand and be more cost effective. Less costs for developers will result in lower rent for apartment residents.
I strongly believe in the virtues of free enterprise, which is based on the strong enforcement of property rights. We need to slightly modify the implementation of our land use laws so that Oregon can compete in a global marketplace and meet demand for housing at all pricing points.
To Quote Ronald Reagan from a 1964 speech, “The more the plans fail, the more the planners plan”.
With a more balanced approach, I am hopeful of better days ahead for all Oregonians. Sensible sustainability, social equity and wealth creation do not have to be mutually exclusive. n
Brian Owendoff has been involved in commercial real estate leasing, development and construction for approximately 20 years, and has lead teams with three of the largest full service national real estate companies in the United States. Brian is principal of BMO Commercial Real Estate L.L.C. a firm that provides an array of advisory services to help owners, occupiers, developers and financial institutions make better real estate decisions. Brian can be reached at 503.201.9590 or [email protected]