☆ Do upzonings produce more housing?

 

Image by Nico Hogg

 

Bills legalizing “missing-middle” construction are passing nationwide, but other regulations stand in the way. Scott Beyer of Market Urbanist suggests that customized high-density proposals can effect real change, in this Opp Now exclusive.

In 2021, California passed a bill that is now being emulated nationwide. SB9 allows by-right construction of duplexes or two homes on combined lots statewide, including parcels previously zoned for single-family homes (SFH). This and similar state and local bills nationwide express faith that moderate-density, “missing-middle” housing—which supporters believe faces less NIMBY opposition than high-rise projects—can help solve the affordable home crisis. But the question is whether these modest upzonings allow enough construction to pencil, in enough places, to put a dent in America’s housing supply deficit. The answer, as I learned through some recent interviews, depends on various economic factors, and what other regulations still exist beyond the rezoning.

This analysis is needed precisely because SB9 has not been too successful. The Real Deal reports that just 211 proposals were put forward for SB9-compliant projects in Los Angeles in 2023, and just seven in San Diego. The criticism is that, because the upzoning is so modest and doesn’t negate other engineering and permitting criteria, it won’t incent people to add a unit to their home, much less spark large-scale redevelopment. According to David Garcia and Muhammad Alameldin with UC Berkeley's Terner Center, “limited uptake of the new law may be impacted by the capacity and staff constraints that many planning departments are experiencing, alongside rising interest rates, high inflation, and ongoing supply chain/construction disruptions.”

Similar laws in Minneapolis and Charlottesville, VA seem primed for the same problems. But they show how such bills might be able to work if additional tweaks were made, as to inform the situation in California.

Minneapolis 2040

Minneapolis made headlines in 2018 and earned accolades from pro-housing activists when the city approved its Minneapolis 2040 plan. The new standards legalized multifamily developments for up to three families citywide, and even higher density along frequent transit corridors. This effectively did away with SFH-exclusive zoning in Minneapolis. It also eliminated parking minimums for new projects.

As of this writing, though, the reform is in limbo: in mid-2022, a Minnesota Superior Court judge ruled in favor of an environmental group’s claim that allowing projects at these densities violated the state’s environmental regulations (an odd argument indeed). The case implied that the rezoning proposal as a whole needed to undergo broad environmental review, rather than evaluating projects case-by-case.

This undermined the effectiveness of Minneapolis 2040. While citywide housing supply in the city expanded from 2017 to 2022 and rent increases have been low relative to much of the country, the role that the rezoning had in this seems negligible.

“Less than 2% of the 7,759 new housing units permitted in Minneapolis over the last two-and-a-half years have been in two- to four-unit structures,” writes Axios’ Nick Halter, citing HUD data.

According to local urbanist commentator Alex Schieferdecker, construction dropped in January 2020 after the plan went into effect. Schieferdecker attributes the moribund production through 2020 primarily to the COVID pandemic and the racial unrest, which started in Minneapolis itself.

Similarly, Cathy Bennett, executive director of the Twin Cities Housing Alliance, stated in a Zoom interview that market conditions have made it harder for small-scale projects to pencil, particularly in neighborhoods that are mainly single-family. Lot combination projects in these neighborhoods had been working, but the outlook soured as project costs and interest rates grew. She also noted that a lack of amenities and walkability can make it hard to generate demand for such projects in residential areas.

“They’re not really able to get the rents to make that pencil out,” Bennett said.

The higher-density developments on transit corridors allowed under the plan have, however, seen substantial unit increases, said Bennett. In an interview with Reason’s Christian Britschgi, a Minneapolis planning official stated that the elimination of parking minimums had done more to boost construction than abolishing SFH zoning. One project will have just 32 spaces for 75 units, a ratio far lower than what the previous parking regime would have allowed, and there has been a general reduction in spaces per project across the city.

A broader issue is that Minneapolis, while maintaining a stronger housing market than many of its Rust Belt peers, was relatively affordable to begin with.

“Unlike in other places, where zoning restrictions act like a cork holding back a shaken bottle of champagne ... in Minneapolis they were capping something more akin to a flat soda,” Schieferdecker writes. “The city was and is a relatively affordable place to live even before the adoption of the comprehensive plan, and has gotten marginally more so in the time since.”

But Cody Fischer, president of Footprint Development, sees factors having to do with the limits of the bill itself. He entered the field thanks to Minneapolis 2040, with the goal of building environmentally-friendly missing-middle housing, believing that the new plan provided more clarity about what development the city wanted where. But he soon learned that burdensome regulations and NIMBY-fueled political micromanagement remain.

Fischer, voicing the complaints of other local developers, notes that in order to move the plan forward, planners were forced to restrict the physical size of projects to the same extent at which single-family homes were capped.

“So if you want to build a triplex, you're limited to let's say 2,500 square feet and you've got to carve that up between three units,” said Fischer by Zoom. “It quickly becomes more sensible ... to just build a single-family home and sell that.” Fischer also reports that there have been no changes to permitting regulations since the 2040 plan passed, such as setback requirements and minimum lot size restrictions. The site planning element of Minneapolis law, in other words, still works in contradiction to its zoning rewrite.

Garcia and Alameldin find a similar situation playing out in California cities where SB9 projects are being implemented, such as height limits and small lot sizes. “Such requirements will almost certainly limit the number of lots that will be effectively eligible for new building under SB 9,” they write.

Another technicality has also worked to tank projects, including one of Fischer’s. The city didn’t update its building code to comply with the new regulations, and opponents of one of his projects objected that it was taller than allowed under the city’s regulations (a charge Fischer disputes). These opponents, aided by a councilmember on the planning commission, were able to hold up the project and cost Fischer thousands in legal expenses.

“That project, 100% by-right when proposed, was initially denied by the planning commission because of neighborhood opposition,” Fischer says. If such meddling is made possible by regulatory inconsistency, the by-right designation seems meaningless.

Charlottesville’s Zoning Rewrite

Charlottesville, a 45k-person university city in Virginia and also my hometown, will soon have its own upzoning experiment. In December of 2023, council voted unanimously on a bill that authorizes at least three-unit projects throughout much of the city, and significantly more in some areas.

The effort was contentious, with years of debate leading up to passage. Even still, final amendments are being added, and there is threat of a lawsuit. It’s too early to assess whether the zoning will spur new housing, but developers have already responded by coming to city staff with pro formas. Recently I had coffee with two of them, Roger Voisinet and Richard Price, to better sense just how well this missing-middle concept can pencil.

Voisinet is a realtor and developer who had already completed missing-middle projects in Charlottesville before the rezoning. Price is an architect who specializes in the style and works with him. They came into the shop and laid renderings on the table, then spoke in clear terms about how the rezoning would change one lot’s potential finances.

Voisinet owns a single-family home with a large backyard near downtown. Post rezoning, he can build three additional units in that extra yard space. This has taken the estimated land value of the lot from $200k to $450k. The estimated total asset value (land + structure) has gone from $650k—Voisinet’s projected sale price for the one standalone home—to about $2.35 million, since there would now be four homes selling at an average cost of $587,500.

Voisinet said that this 9.6% per-unit price reduction is because, rather than having one home with a big yard, he would subdivide that same lot into four separate parcels with their own small yard and driveway.

“Because you don’t have to amortize one big lot in a house, you’re actually building four smaller ones, it might bring down the average price of housing,” Voisinet said. “It’s not creating affordable housing, but I think it’s certainly helping stabilize or maybe even reduce the housing price [citywide].”

Added Price: “Roger can make more money by selling less expensive housing.”

 

In this rendering of a Charlottesville lot by Richard Price, AIA, the three white buildings are added to the backyard of an existing home and each given their own driveway.

 

Therein lies the promise of upzoning bills, even the mild ones that have passed so far. Subdividing existing lots not only means more net housing, but having the cost of fixed assets (in this case land) spread across more units. The end result is a cheaper per-unit cost.

The flip side is that if rezonings happen but there still isn’t an easy way for landowners to redevelop property, it could increase home prices. The greater development potential would get priced into the market, but the new housing wouldn’t materialize.

On that point: Charlottesville’s rezoning efforts are dealing with the same hurdles as in Minneapolis and elsewhere. Price says that various developers have already contacted him about taking advantage of the new law. But it conflicts in some ways with the city’s site engineering laws, such as a 6,000 sqft minimum lot size requirement, and there is not adequate staff in city hall to address these contradictions and push incoming proposals through.

Lessons for California

These Minneapolis and Charlottesville examples reflect a struggle that is occurring nationwide, as missing-middle-style upzoning bills get passed in Memphis, Oregon, Massachusetts, and elsewhere. They present an opportunity to increase unit count without drastically altering the character of single-family neighborhoods—a longtime NIMBY fear. But SFH zoning doesn’t exist in a vacuum—other, often-conflicting regulations remain on the books, showing that the path to deregulation must be holistic.

“The people who are building [missing-middle], they're not large-scale real estate developers,” concludes Fischer. They range from small-scale “mission-oriented” entrepreneurs like himself to individual homeowners, and lack the resources to withstand protracted legal and community battles.

The other case that these early examples make is for upzonings to be bolder—i.e., more permissive about density than the bills now being passed. Bills that are more generous would draw in wider segments of the development community who are better capitalized and able to build larger projects. Bills that only allow three extra units around an SFH, by contrast, won’t create truly dense projects unless the developer can somehow assemble lots of land. To my knowledge, none of these upzoning laws have produced new “podium buildings”—a common 3–6 story vernacular that typically yields 100 or so units.

Reform on either front will likely need to happen at the local level, via a pioneering community that wants to go more extreme than the others. It would be an appropriate thing for some California cities to do, given the statewide housing shortage and the sluggish outcome thus far of SB9.

One of them might try their own version of SB827, an earlier pro-density bill that failed in committee. That bill would’ve allowed “Paris-level densities” of 5–8 stories near transit stops, while granting other waivers on parking and aesthetics. A California city that tries something similar nowadays could apply it solely to major corridors and growth areas, then expand it to single-family neighborhoods as market demand arises. This localized SB827-style bill would need to nix other, aforementioned regulations that get wrapped around and ultimately stifle development. The most notable one seems to be lot size requirements that discourage lot splitting.

If one city in California (or beyond, for that matter) were to do their own customized version of a high-density bill, it would put them ahead of other states and cities that now do these moderate, watered-down bills. It would help that city become a possible national leader in housing production and zoning reform.

San Jose, what’s stopping you?

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