The potential and limitations associated with inclusionary zoning, a tool used by a growing number of U.S. cities to encourage or require workforce housing development, are explored in The Economics of Inclusionary Zoning, a new report from ULI’s Terwilliger Center for Housing.

Whereas many U.S. cities have experienced a post-recession economic revival, the accompanying run-up in housing costs is threatening to undermine this success by pricing workers out of cities, lengthening commutes, and diminishing livability, the report notes. As a result, local officials are turning to inclusionary zoning (IZ) as a way to combat the shortage of housing that is affordable to moderate- and lower-income workers.

IZ policies take a market-based approach to affordable housing development by requiring or incentivizing the creation of below-market-rate units in exchange for approval of a market-rate project. Inclusionary zoning leverages private development to achieve a public benefit.

And while the concept seems straightforward, implementation of IZ is more complex. This may be why a relatively modest number of affordable units—a conservative estimate is 150,000—have resulted from roughly 500 inclusionary development programs across the United States, according to the report.

The report notes that inclusionary development policies are most successful when several other conditions exist, including:

• the level of market-rate development in the local market is sustained and substantial;
• the policy targets households on the higher end of the affordable/workforce spectrum—those earning 60 to 120 percent of the area median income (AMI);
• the right incentives are offered to make up for the loss of net operating income that comes with the inclusion of below-market-rate units. These can include direct construction subsidies, tax abatements, density bonuses, waivers of parking requirements, opt-out payments to an affordable housing fund, or land donations; and
• the policy is carefully crafted to avoid adverse effects like placing a chill on development or raising rents or land and home prices.

The growing use of IZ in cities across the United States has prompted requests for a ULI analysis of its effectiveness. Economics evolved from a series of conversations with district councils in development-intensive cities where housing costs are rising, says Stockton Williams, the report’s primary author and executive director of the Terwilliger Center.

District councils are periodically asked to provide elected officials, the development community, and other stakeholders with unbiased information on how inclusionary zoning could actually work in their cities. ULI members and staff have also sought advice on how best to optimize incentives to encourage developers to participate in IZ and propose projects in areas where it is not mandatory.

The report takes an agnostic approach toward inclusionary zoning, saying it must be considered one among many tools city leaders use to expand affordable housing in their cities. 

“Reports like this help district councils share unbiased, highly trusted research with local stakeholders at the local level,” says Michelle Landers, executive director of ULI Boston/New England. “Policies like inclusionary zoning can have tremendous impact when implemented based on best practices and a real-world analysis.”

Atlanta is among the cities that have been debating inclusionary zoning for several years. Initially declared unconstitutional, IZ is now being revived as one policy tool to correct imbalances occurring in certain neighborhoods. Atlanta’s boom in multifamily development has created a ripple effect: Class B properties are being upgraded to luxury product, pushing market-rate rentals into the unaffordable category for residents who could once afford them, says Sarah Kirsch, executive director of ULI Atlanta.

Victoria Davis, president of Urban Atlantic and Terwilliger Center board member.

“There’s been a total erosion of workforce housing,” she says. “There was a recognition by all parties that we have to do something. This report really brought the issue of affordability into focus, and affordability is something that we are all really concerned about.”

From a developer’s perspective, the report succeeds in spelling out incentives and emphasizing that a flexible approach by local government is key, explains Victoria Davis, a Terwilliger Center board member and president of Urban Atlantic, a real estate development company in the Washington, D.C., metro area.

Davis developed Rhode Island Row, a transit-oriented, mixed-income rental community in Washington, as an inclusionary project without a single subsidy. It worked, she says, because she was able to move sources of financing around to cover the affordable units, which make up 20 percent of the 274-unit development and serve households earning less than 50 percent of AMI.

“It’s up to local jurisdictions to facilitate it and make it easier,” Davis says. “Both a regulation that is permissive and subsidies are critical to making inclusionary development happen.”

To read the report and learn more about inclusionary development, visit uli.org/report/economics-inclusionary-development/.