Saturday, March 29, 2014

Affordability, Part 2: Opportunity Costs and "Highest and Best Use"

One reason I like to do outreach on zoning issues is that I learn a lot from these forums. Each neighborhood has its own set of development issues -- some are unique; others are variations on common themes or harbingers of things to come. And every neighborhood has a wealth of local knowledge, eagerly shared by people who have watched and analyzed what's been going on around them. The social scientist in me -- I'm a former college professor with an interdisciplinary background in law and society -- is fascinated by the variety of ways in which the same rules play out differently across the city.

This post was inspired by Ward 1, where "condo-ization" puts single-family housing stock and neighborhoods at risk.

"Single-family homes" can (and do) accommodate a variety of different types of households -- nuclear families with or without kids, multi-generational families, groups of roommates, boarders, live-in caregivers, and renters of accessory units. Over the course of its lifespan, the same house may move fluidly between these various types of living arrangements.

What makes condo-ization problematic is that, once a property ceases to have a single owner, this fluidity is lost. Suddenly, even though it's still one building, the house is no longer one property. And finding a single owner who is willing and able to re-acquire all the units post-conversion (probably over time and with the possibility of holdouts) seems unlikely.

In neighborhoods like Mount Pleasant and Lanier Heights, residents have seen that condo-ization is pushing housing costs up -- not down. Rent in a group house is affordable to recent college grads and other newcomers who wouldn't have the financial means to live in the same house if it were divided into condos selling for upwards of $500,000 each. Increasingly, condo conversions are effectively pricing older homes in these communities out of the single-family market. They're also changing the look and scale of historic rowhouse neighborhoods by incentivizing pop-ups and pop-outs.

In general, the most affordable housing is in older buildings. Which means that when older residential buildings get torn down and replaced by newer residential buildings, the net result is likely to be increased housing costs. Basically, it only makes sense to tear one building down and build another to serve the same function if the replacement building will produce substantially more income. When bigger buildings replace smaller buildings, part of the increase in income comes from the fact that there are more units to sell or rent, but it's also the case that a new building (or unit) will most likely command a higher rent or sales price than an older one -- in part, just because it's new but also because, from a development perspective, projects that command higher rents are more attractive, especially in places where land values and existing properties haven't yet realized the full market potential of the area. That's why seemingly every new multifamily project in DC is a"luxury" condo or apartment building featuring lots of smaller units.

Subdivision is a more ambiguous phenomenon than teardowns -- it can happen for a variety of reasons (e.g. if there's no market for single-family homes of a particular size in a particular area) and its economic consequences may vary. In areas where single-family homes are scarce and in high demand, downzoning (and/or other restrictions) may be necessary to preserve existing housing stock. In the past, some rowhouse neighborhoods relied on historic designation to protect neighborhood scale and character. But, increasingly, historic preservation hasn't proven sufficient -- which, presumably, is one reason why Georgetown requested (and was granted) a reduction in allowable building heights (from 40 to 35 feet in rowhouse zones) in the ZRR.

There's a broader issue here -- and it's not limited to historic neighborhoods or areas, like Lanier Place, where the existing zoning is out-of-sync with the built environment. In general, once OP starts loosening zone definitions, new ways to use land are put in competition with existing uses. And where the existing uses are single-family homes, those will quickly cease to be the "highest and best" (i.e. most lucrative) use of the property. So the conversions begin -- and, as Ward 1 residents have pointed out, some of those conversions will not be reversible.

If we value single-family housing (or if we want garden apartments, or if we want neighborhood-serving retail, or any other relatively small-scale type of development), then we need to have restrictive zoning that is consistently enforced. Zoning that restricts the use of some parcels to single-family housing (or to some other specific use) doesn't have to mean suburbanization -- different types of zones can be located in close proximity to each other in the same neighborhood. The issue is limiting the range of potential uses in competition for the same property, so that market forces don't overwhelm desired types of development.  Which, after all, is the raison d'etre of planning and zoning.