In early 2019, the Minneapolis City Council voted almost unanimously to introduce new rezoning laws that allow multifamily units to be built in what used to be single-family-only zoning areas.
Their plan, called Minneapolis 2040, makes the city the first in the country to do away with single-family zoning practices. It calls for applications to increase the development potential of land by 60 percent and requires developers to include a percentage of affordable housing in each development.
The overarching goal of the plan is to create more accessible and ample housing options for the city’s rapidly growing population.
Minneapolis’ policy changes are a prime illustration of a trend called upzoning, and it’s changing the face of cities across the country. Many major cities are rethinking their current zoning laws to allow for multifamily and mixed-use development. This zoning overhaul is meant to address issues like overcrowding, skyrocketing housing prices, and a shortage of low- and middle-income units that keep housing in safe, convenient neighborhoods out of reach for many.
Furthermore, the creation of duplexes, triplexes, and garden apartments is meant to fill a gap called the ‘missing middle,’ and reverse a decades-old zoning practice that had discriminated by race and social class.
All of this has grown out of the YIMBY movement (‘yes in my backyard’), where city residents welcome new development in the hopes of getting more abundant and cheaper housing. Of course, there are still those who don’t want to see their neighborhoods become hotbeds of development activity, the so-called NIMBYs (‘not in my backyard’). Still, as more people move to densely populated areas, the idea of expanding and diversifying housing is becoming more and more attractive.
For property managers, an increase in housing density could mean more opportunity, but only if the goals of upzoning are truly met.
Let’s take a look at how upzoning translates to different cities and how it’s truly affecting the housing market.
The Growing Popularity of Upzoning
In high school economics, you probably learned about supply and demand. As the demand for a limited resource increases, so does the price. And that’s exactly what’s happening in the housing market.
According to Freddie Mac, as city populations have increased, housing affordability has, in turn, declined. In fact, 85.9 percent of metropolitan areas in the nation have lost much of their affordable housing, and the faster the population grows in a city, the more affordable housing they lose. In fact, the fastest-growing cities are losing their reasonably priced housing at twice the rate of the national average.
In some neighborhoods, housing is simply inaccessible, forcing residents to move further and further out, increasing commute times, putting strain on infrastructure, and escalating environmental issues.
However, different cities are handling upzoning in different ways. Some are simply relaxing current zoning laws, while others are rezoning with a specific goal in mind. Let’s take a look at a few case studies to see how cities are implementing upzoning and what effect it’s having.
The Application and Effects of Upzoning
Over the last several years, different cities have applied the principle of upzoning in new ways to solve a multitude of problems. In some cities, it has shown positive results, while other cities still struggle with overcrowding and rising prices.
New York City: Missing the Mark
For the past 10 years, first under Mayor Michael Bloomberg and then under Mayor Bill de Blasio, New York has been rezoning its neighborhoods to address its affordable housing crisis. Whole sections of the city have been rezoned to relax former regulations and encourage developers to build more affordable units.
But in neighborhoods like the East Village, rezoning hasn’t created the number of affordable units as city officials originally anticipated. In that case, affordable housing units weren’t required, but encouraged; and restrictions were put in place to preserve the character of the neighborhood.
As a result, according to Curbed, slightly more than half of the anticipated units were actually built.
Seattle: Addressing Climate Change
In Seattle, the Mandatory Housing Affordability plan allows builders to create high-density residential areas to increase profits, but requires a certain number of affordable housing units in each new development.
However, according to The Seattle Times, the benefits could go beyond affordable housing to address issues like climate change. By creating denser, more walkable neighborhoods where residents have everything they need, Seattle hopes to reduce carbon emissions through its efforts.
Washington, D.C.: Success of NoMa
The goal of the nation’s capital was to use upzoning to promote urban regeneration—and it’s been a success. Areas that were once comprised of abandoned lots and deteriorating industrial parks around the Union Station transportation hub have been rezoned to allow for mixed-use development and multifamily residences.
Now called NoMa (North of Massachusetts Avenue), the new neighborhood contributed $49 million more in property taxes in 2012 than it did in 2006, according to the World Bank.
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Metropolitan California: Results May Vary
Los Angeles, San Francisco, and other high-density areas in California are experiencing their own housing crisis. The San Francisco Bay Area has seen housing prices skyrocket as tech startups attract workers from all over the world.
Since last year, California has been considering their own upzoning options to alleviate the housing crunch. While many see the benefits of multi-unit housing, some experts are more wary of the potential outcome.
According to the Terner Center for Housing Innovation at UC Berkeley,
The impact of upzoning is going to vary significantly based on local housing market conditions, including a neighborhood’s current housing stock, the strength of the local housing market, and the existing local zoning rules governing land development. While upzoning may change market dynamics in some neighborhoods, in others, the existing stock or costs of construction may mean upzoning will do little to make new housing developments financially viable. Policies are also needed to ensure that the benefits of upzoning are leveraged for more affordable housing units, and that renters are protected from displacement pressures.
Because upzoning is relatively new, it’s difficult to understand its true impact on cities and their residents. While New York and Washington D.C. have some viable data to work with, other areas that have implemented upzoning have to wait and see just how their new zoning laws will affect communities.
The same is true for property managers wondering how a sea change in building codes will affect their portfolios.
How Will Upzoning Impact Property Managers?
As we mentioned, there are still more questions than answers when it comes to upzoning. However, there are some key points to consider if you’re a property manager.
More Housing = More Potential Clients?
It stands to reason that if developers build more properties, there will be a higher demand for property managers to oversee them.
For example, the Terner Center for Housing Innovation at UC Berkeley cites an analysis of three BART stations in the San Francisco Bay Area by urban analysis software company Urban Footprint. They estimate that if California passes upzoning regulations, the number of units around MacArthur Station would increase from 4,447 units to 27,156. The Rockridge Station could see units increase from 4,096 to 25,500 units. In Orinda, the projected increase is from the current 731 units to 12,090 units.
Those are huge numbers that signal a possible surge in demand for property management professionals.
Where Upzoning Can Falter
A recent study published in Urban Affairs Review by MIT doctoral student Yonah Freemark looked at the effects of upzoning in Chicago neighborhoods. In Chicago’s case, the city simply relaxed zoning laws to allow for multi-unit construction, but didn’t set minimums for affordable housing units or create incentives for developers.
Freemark’s study looked at housing data from the time of the upzoning in 2013 and five years later, in 2018. He compared it to housing data from 2010, before the upzoning laws went into effect.
What he found was that no new housing had been created, but property values and rent prices went up anyway. And while he acknowledges that five years is too short a time period to accurately measure the effects of upzoning on housing development, he was surprised to find that the relaxed regulations had an immediate effect on prices.
There’s another unintended consequence of upzoning, as well: Consolidation stoked by large housing corporations holding a monopoly on new units, which could mean fewer ways for property managers with small businesses to stay involved.
For property managers, it boils down to this: Upzoning doesn’t necessarily mean an immediate increase in housing availability, and subsequently portfolio growth. And it doesn’t mean that there won’t be either—since supply and demand will vary city to city.
More Luxury Units (and Amenity Wars)
Many developers may see upzoning as an opportunity to build more luxury units. Many of the neighborhoods where upzoning are under consideration are in highly desirable areas that are close to transportation and other urban conveniences. They also tend to include more amenities that attract desired resident populations.
Let’s look at the NoMa neighborhood in Washington, D.C. again. As building escalated in the capital, rents generally declined, except in NoMa and other newer neighborhoods. That’s partially because newer, more luxurious units were built there that caused the median rent to rise.
What does that mean for property managers? Newer luxury buildings will have more than just pools, game rooms, and fitness centers. They may also have dog parks, playgrounds, conference rooms, and even meditation rooms. They will have a regular schedule of events and activities for their residents as well. Property managers will need the skills and experience to run what are now essentially multifunctional live/work/play centers.
The Net Result Remains ‘To Be Determined’
Upzoning is a very new concept, and both city and state governments are still ironing out the kinks. There are very few case studies that allow us to fully understand the impact it will have on neighborhoods, residents, investors, and property managers.
In many cities, it’s still unknown how upzoning will change a neighborhood’s population. A variety of housing options could mean a more economically-diverse population of residents. However, if housing developers do move in and build more luxury units, you could be looking at an even less equitable outcome.
A lot depends on the goals of upzoning and how a city or state implements new zoning laws. Are they simply relaxing old single-family laws, or are they requiring a minimum of affordable housing units? Are they including mixed-use development, or simply multifamily development?
However it unfolds, this is an important movement in urban planning and development that is going to change the face of cities across the United States. Property managers should keep their finger on the pulse of their own area’s housing issues to understand how it will affect their portfolios. Adapting to these changes will prevent property managers from missing new opportunities and growing with the societal changes hand in hand.Read more on Property Management Trends