Portland crafted a building code aimed at walkable, green neighborhoods. Developers say it’s part of the housing crisis

Justin Wood knows the vacant lot at Northeast 60th Avenue and Northeast Ainsworth Street could easily accommodate 10 households.

The 13,000-square-foot Northeast Portland corner currently holds one 1,200-square-foot house. Wood, a developer, says he could repopulate it with a cluster of 10 affordable townhouses of 800 square feet each — a small step in adding to Portland’s dearth of housing supply.

“It’s the exact kind of development the city says it wants to see right now,” said Wood, who owns Fish Construction NW, a company that focuses on building new homes for families making at or below median income levels.

The landowner initially asked Wood if his company would be interested in buying and developing the property. Wood said he knew after taking one look at the lot that it wouldn’t pencil out.

To build, Woods knew, the city would require he add a stormwater drainage system and new sidewalks. Combined, those could cost up to $250,000 — the estimated price to buy the property. He’d also have to cover the cost of building materials, labor costs, real estate agent pay, construction loans with creeping interest rates, city bureau development fees, and the cost to hold the empty lot for the months it can take for the city to process permits. With each unit selling for around $300,000, Wood estimated that he’d make about $35,000 in profit per unit. After taxes, that payout would drop closer to $20,000.

“Sure, it sounds like a lot of money,” Wood said. “But it’s not enough for most people in this industry to make that kind of investment.”

Wood usually aims to make around $40,000 on each house.

The cost to build new housing in Portland has ticked upward in recent years, partially due to the accumulation of specific development requirements, like new sidewalk development guidelines and stormwater drainage plans. These types of requirements were put in place by the city in recent years to meet climate and equity goals, all meant to improve Portlanders’ quality of life.

“It’s not my place to say that those are not important improvements,” Wood said. “But those requirements will probably prevent that property from ever developing.”

Wood is far from the only Portland developer deterred by these costs. A recent city poll of local housing developers identified these kinds of new building requirements — ranging from mandatory bicycle parking spaces to bird-safe windows — as policies the city should suspend to accelerate housing development in Portland.

Portland has long been a national leader for its efficient land use planning and sustainable development practices. These methods are reflected in Portland’s walkable neighborhoods dotted with local small businesses, community spaces, parks and accessible public transit lines. But, whether it’s required eco-conscious building materials or mandatory low-income housing units in large apartment buildings, the incremental expansion of these building requirements over time has begun to add up.

Developers say these well-intentioned policies have disincentivized construction in Portland at a moment when new housing is in critical demand. But urban studies experts say that rolling back these requirements is shortsighted, and places Portland’s collective health at risk in exchange for developers’ financial comfort.

The city estimates needing to produce 295,000 additional units by 2040 to accommodate current and future population demands. To meet that goal, the city would need to see an average of 17,000 new housing units built each year — more than five times the current production rate. According to the most recent city data, Portland witnessed an average of 3,381 new housing units built annually between 2018 and 2021.

Meanwhile, Gov. Tina Kotek has set a goal to increase the state’s annual housing production to 36,000 units, up from 22,000 — and the state Legislature has passed bills to make sure cities help meet that target.

With a state mandate to dramatically increase housing and a ballooning homeless crisis spurred by housing costs, Portland leaders are considering all options to fast-track housing development. That might include rolling back some of its celebrated development standards.

“It’s not even so much that we need to blow our system up,” said Wood, who sits on the governor’s Housing Production Advisory Council, a group of industry experts tasked with counseling Kotek on how to reach her housing goals. “It’s just asking questions, like: ‘Is there a purpose for this regulation? What is it, and why do we need it? And can it be done better?’”

A lot of smaller costs

There’s not one single development cost required by the city that throws off developers’ project budgets; it’s an accumulation of line items.

Many of the development requirements burdening builders were first introduced by the city as incentives. For example, the city established an incentive program in 2008 for developers to build eco-roofs. After seeing considerable buy-in from builders and a positive environmental impact, the city turned that policy into a mandate for all buildings in the city’s urban core in 2012. This requirement — paired with others focused on building green spaces, bicycle parking and stormwater runoff systems — was established to meet the city’s goal to significantly reduce carbon emissions and slow the effects of global warming.

But these items began to add up.

In the city’s recent developer poll, meant to collect recommendations on how to expedite housing construction, respondents bemoaned the requirements levied on new construction in the city’s urban core. Those included mandates to use windows that are reflective enough to keep birds away, build eco-roofs and ensure that the first floor of any residential building includes public areas.

“It is not selecting just one of these items to correct that will cause a change in production,” wrote one respondent. “The problem is systemic.”

For people looking to redevelop older buildings, the price of construction to prevent a building from collapsing during an earthquake creates another deterrent. Those types of seismic retrofits are required by the city whenever a building undergoes significant redevelopment and can add around $150 per square foot to a development project, according to Maurice Reid, an architect with the firm Gensler.

“That [cost] puts developers over the edge,” said Reid, who recently studied the feasibility of converting Portland office buildings into apartments.

While Reid found that the redevelopment is architecturally possible, he found that the overall return on investment for developers remains low due to costs like seismic retrofitting and system development charges — fees based on how new construction might impact city utilities, like the sewer system or public transportation.

Portland City Council voted in March to waive up to $3 million in system development charges, or SDCs, for developers seeking to convert a vacant office building into a residential property.

Most developers said that the discount still wasn’t enough to offset the cost of seismic upgrades and other design requirements.

“Certainly [seismic retrofitting] can be a significant cost driver for some of these projects,” said Sarah Zahn, a Portland developer and president of Oregon Smart Growth, a developer advocacy group. “But even if you took seismic entirely out of the equation, it’s still very expensive to make these conversions happen. The reality is, it’s not going to be cheaper to do these conversions than it would be to build a new building.”

Reducing the cost of SDCs is a tool the city has regularly relied on to incentivize residential construction and lessen the blow of other auxiliary fees — even if the loss of revenue decreases the bureau’s annual budgets.

It’s how Wood has been able to build housing and sell it at below-market prices for years. The Portland Housing Bureau has a program that exempts developers from paying SDCs if they guarantee the house is being sold to a household making at or below the region’s area median income (which, for a family of four, currently sits at $106,500). The asking price cannot rise above a price set annually by the housing bureau, currently capped at $455,000. The homebuyer is exempt from property taxes for a decade under this program.

Wood considers it a win-win.

“It’s about a $35,000 discount for us,” Wood said. “And it allows a lot of first-time homeowners to begin generating wealth. If not for the SDC waiver program, I don’t know that we could sell in these price ranges.”

But there are ways these waivers could go further to help spur housing development.

Through her development firm HomeWork, Jessy Ledesma focuses on building workforce housing — a term for housing affordable for people making between 60% and 120% of area median income, similar to those buying Woods’ homes. But, unlike Wood, Ledesma builds rental housing, which is not offered the same kind of sweeping SDC waivers in exchange for workforce rents.

Instead, the city offers SDC waivers on rental housing affordable for people making 60% median income and below. Keeping all rents this low makes it hard for the construction costs to pencil out, even with the SDC waivers.

“Unfortunately, it really does come down to cost,” Ledesma said. “SDCs are arguably a small piece of a budget, but removing them … that’s one tool that the city does have available.”

Inclusive, but more expensive?

It’s an issue larger market-rate rental builders have raised with another city development requirement called inclusionary housing. Inclusionary housing is triggered for developers when they build apartment complexes with at least 20 units. The policy mandates that 15% of those units must be affordable to people making at least 80% area median income, or 10% affordable to people making 60%. In exchange, developers can have SDC costs and property taxes waived for affordable units.

Since City Council introduced the inclusionary housing policy in 2016, developers have shared scores of anecdotal evidence that the policy has driven development out of Portland. There’s no data to back up this claim, but the city has hired an outside firm to actually crunch the numbers. It will share its findings later this year.

Ledesma, however, believes the problem with inclusionary housing is its limitations. She’s currently working with another developer to build two new apartment complexes in Southeast Portland which qualify for inclusionary housing. Each has nearly 40 units, meaning a combined total of eight units will be capped at rents for people making 60% median income. But Ledesma wants the rest of the building to be limited to families making no more than 80% of the median income. Hoping the city would want to support this voluntary rental cap, she asked city staff if she could be granted SDC and property tax waivers for all of the units. They declined, explaining that it wasn’t part of the city’s policy.

“You would think they would be encouraging any affordability from developers who are volunteering beyond what’s required by inclusionary housing,” Ledesma said. “During such an extreme housing shortage, it feels to me like there should be some exemptions to those rules in order to remove barriers.”

Without help from the city, Ledesma said she might have to list most of her apartment complexes at market rates. It’s the city’s strict adherence to its policies, like Inclusionary Housing and certain development requirements, that Ledesma and others believe are antithetical to the city’s ambitious housing goals.

“It’s these well-intentioned, city planning policies,” Ledesma said. “A lot of folks support the intention behind them, myself included. But if they lead to building fewer units, it’s time to rethink our priorities as a city.”

The reason we do it this way

Matthew Gebhardt, a professor at Portland State University’s Urban Studies and Planning Department, agrees that this is a conversation centered on priorities. He said it makes sense that developers have zeroed in on sustainable development requirements as a leading deterrent to their work.

“Private developers prioritize profitability,” Gebhardt said. “They have to deal with interest rate increases, material cost rises, labor cost rises … so when they’re trying to balance things out, it’s not surprising that in looking to cut costs, some of the things that they would prioritize are the things that provide collective benefits and not benefits directly to them.”

Those collective benefits can come in the form of low household energy costs, increased access to low-income apartments and urban cooling measures that can prevent deaths during a heatwave. Gebhardt noted that developers themselves may also be enjoying these benefits as Portland residents.

He said it’s important that the city really consider the trade-offs that come with cutting these benefits.

“I think that plans and regulations shouldn’t be static,” he said. “But when we revisit them, it should be a process of carefully considering what the implications are, rather than a quick response just because developers say that they can’t make this work now.”

If data shows that these regulatory costs are truly burdening developers, Gebhardt said the city could consider introducing temporary funding sources to offset costs. That could help support developers until other costs associated with construction — tied to interest rates or construction delays caused by city permitting slow-downs — are lessened.

Wood, the housing developer, said that waiting a year for numerous city bureaus to process building permits for one property can cost up to $20,000, due to loan and tax payments. That number has steadily grown as interest rates have ticked upward in recent years. While the city has convened a task force and strategic plan to improve the labyrinthine permitting process, developers haven’t yet seen it impact their project timeframes.

“My sense would be that [addressing permit delays] will be much more impactful to deal with costs right now,” Gebhardt said.

The housing equation

Ledesma, Wood and other workforce housing developers argue that the city’s housing affordability crisis would best be addressed by building more housing affordable to households making near the area’s median income.

That’s because a shortage of housing within range for middle-income Portlanders also hurts the supply of lower-income housing. If someone living in low-income housing gets an income boost or sees their wealth grow for another reason, it’s possible that they may want to move into a new home that meets their new budget. But if housing for people earning slightly more income is scarce, it’s natural for that person to want to remain in their affordable unit. That leaves one less affordable unit available to a low-income household in need, which could prolong the amount of time that someone may have to experience homelessness.

Diane Linn, director of the nonprofit Proud Ground, sees that backlog play out in real time. Proud Ground is a community land trust focused on creating a permanently affordable property for Portland homebuyers. The nonprofit does that by purchasing property at market prices and reselling those homes to households making below 100% of the median family income, all while continuing to own the land. When the homeowner wants to sell the property, Proud Ground steps in to ensure that the cost of the property remains affordable. Proud Ground owns over 300 homes.

Linn said there are about 500 households on the waiting list to get into any of the properties in the organization’s portfolio.

“It’s a combination of lack of inventory and rising costs of production,” Linn said. “Our community has to lean into any and all solutions.”

The city made moves to address the shortage of this kind of mid-range housing with its Residential Infill Project in 2021. This program erased bans on building “middle housing” — a term describing duplexes, triplexes, fourplexes and clusters of small townhomes — on lots traditionally zoned for a single home. At the time, city planners hoped the move would nudge developers to consider building more middle housing over the next decade or so. But when the plan went into effect in August 2021, they saw a much more immediate response. In 2022 alone, Portland saw 1,246 new middle housing units built.

“We couldn’t have anticipated the massive pent-up demand for housing,” said Morgan Tracy, a senior planner in the city’s Bureau of Planning and Sustainability.

The city previously calculated a need for the city to add 20,000 units of middle housing between 2010 and 2035. While that number is currently lagging behind schedule by just below 8,000, the interest in middle housing development following the passage of the infill project has city staff confident it’ll meet that milestone. Tracy, who spent years developing the project, said its success is heartening. But it’s wrong to consider this interest in middle housing construction to be the solution to Portland’s housing supply problem.

“Middle housing is not a supply-buster, it’s a choice-buster,” Morgan said. “It offers another option. Supply is to come from more multi-dwelling apartments and condos. That’s just the nature of the scale of development.”

Costly construction requirements could slow that supply chain.

Baby steps toward solutions

The city is hoping to chip away at those barriers. In January, City Commissioner Carmen Rubio, who oversees the housing and development bureaus, announced her intent to increase housing in Portland by spending the next several months researching ways to expedite development. Rubio said she’s interested to learn if some city policies have had an unintended impact on housing production, and how the city can restructure them without sacrificing the city’s values.

“Nothing’s off the table right now, we need to be able to look at every option,” Rubio said. “There are no wrong perspectives. … There can be multiple truths in a crisis.”

It’ll take months for these larger solutions to crystalize and reach the City Council. But there are some immediate fixes Rubio has prioritized, like streamlining information about development requirements across city bureau websites and creating a specialty team that can quickly respond to permitting requests for small, straightforward construction projects.

Rubio recently introduced an ordinance that will allow housing developers to defer SDC payments for at least two years to spread out the financial burden that might accompany the fees. The policy expires in 2025, as a way to incentivize near-term construction.

“This will make many housing projects more financially feasible and spur additional investment in our housing market,” said Rubio at an April 5 council meeting.

Rubio said she’s hopeful that the coming overhaul to Portland’s form of government — which will streamline bureau oversight under a city administrator — will also help streamline some of these processes.

The city’s work may be expedited by new mandates coming from the state government. In January, Gov. Tina Kotek laid out a goal for Oregon to start producing at least 36,000 units of housing each year to make up for inventory shortfalls — with a goal to add 348,000 homes by 2030. The state Legislature followed Kotek’s direction in late March by passing a bill that would require cities to establish their own annual housing production goals for specific income levels — and penalize jurisdictions that fail to meet those targets.

Michael Andersen, a housing researcher at the Sightline Institute, said history can help illustrate how costly housing construction requirements might stand in the way of Oregon reaching Kotek’s production goal. The last time Oregon met such high production targets was in the 1970s when the state added nearly 330,000 new homes in a decade. While Oregon’s population has doubled since then, its construction labor force has tripled, which should allow for faster housing production.

“The issue isn’t the lack of workers,” Andersen said. “It’s that we have higher standards of what constitutes a home. There have been 50 years of good ideas turned into new regulations that have piled up since then.”

Andersen said the intent behind these incremental, often costly regulations isn’t to blame. But that doesn’t mean they aren’t worth examining in the midst of a housing crisis.

“There’s a tendency to try to identify a villain in these situations,” said Andersen. “But I think we instead need to be worried about our good intentions. We’ve created all these well-meaning policies. And now we’re seeing their cost.”