A Word From The Architects On Housing: Size Does Matter

Earlier this week I mentioned that what is needed in housing is the same conversation about costs associated with building new, subsidized housing that this beginning in the transportation world about the cost of rail. The most expensive projects are consistently ones using Low Income Housing Tax Credits (LIHTC), with some of those projects in California reaching the shocking development cost of $1 million per unit. What’s behind these costs? Some of it is the inflation that has bedeviled almost all construction projects. Not long ago, I asked a question I’ve been persistent in asking: Wouldn’t smaller units make more sense? Not fewer rooms, but incrementally smaller units that would allow more units per project, lowering the cost and creating more housing for people that need it, those earning less money. Here’s part of my conversation with David Kelley and Michael Bonn of Ankrom Moisan architects, a firm that builds LIHTC projects. My questions are in bold, and my response are in italics.

Over the years, LIHTC projects have risen in per unit total development cost. In California, one project hit $1 million per unit. Why do you think this is happening?

While we’re seeing most projects in Oregon come in at less than a third of those numbers, we are seeing escalating costs. From the architecture perspective (discounting all the developer costs) we’re seeing a number of elements contributing to escalating costs:

• Inflation in the cost of building materials. The commodity markets are more volatile than ever it seems. Lumber, steel, electrical gear, equipment, and many others have been quite elevated at times.
• Regulation:

1. Changes to the national electrical code increased the size demands of their gear and electrical rooms.
2. Sustainability legislation is requiring ERVs (Energy Recovery
   ERII
   Ventilators) for multi-family housing. Where before we were allowed to discharge exhaust air to the environment, we now have to route it through ERVs to scrub the heat energy off of it first. It’s a wonderful move toward reversing global warming, but it comes at a cost.
3. For the Stratus Village project in McMinnville, Oregon, the ERV requirement was not yet in effect when we started design and did early pricing for the funding packages. By the time we were into Design Development, the Oregon Energy Code had changed and the project had to absorb the added cost to continue.
4. Jurisdictional approval is often difficult and time-consuming. There has been movement in recent years through legislation to streamline this process for affordable housing, but it’s not everywhere and it’s not a perfect system yet.

This answer is important, so important it deserves to be here as a guide post for people who might ask the question, “How do we create more affordable housing?” My mantra has long been, “We don’t need more affordable housing, we need more housing so that it is affordable.” But even if you reject my supply side economics, the fact is that housing being built through the LIHTC program is not producing as much housing as it could because of all these costs; the same costs, by the way, impacting market rate housing, pushing up costs there, and thus creating the need for more subsidies. Arguably, inflation comes and goes, but once the regulations Bonn mentions are in place – well intended as they are – they will never go away without huge political effort. Local governments need to be held accountable for the regulations that are driving this problem.

Kelly and Bonn emphasized their desire to include energy efficiencies in their designs — but the mandates being imposed take decades to pay for themselves, and in the end, won’t be felt much by the residents who pay their own utilities. It’s part of the split incentive problem, something I wrote about years ago; it’s hard for a tenant to rationalize paying for efficiencies upfront when that tenant doesn’t pay for their electric bill directly. But the inverse has an effect too. When a tenant does pay for energy, builders and developers can avoid making improvements. The mandates seem to be worse still, requiring efficiencies that are expensive up front, reduce supply, and in the end don’t produce much energy savings.

There seems to be a pretty strong correlation between unit size and per unit cost; make units smaller there is higher yield per square foot and lower monthly rents. Why not make smaller units (not fewer rooms) the way the market has responded to rising rents and costs?

In Oregon, we need to design to the standards of Oregon Housing and Community Services (OHCS). OHCS limits the minimum size of units – by bedroom count – to protect against developers overstepping and packing too many people into too small of spaces. As construction costs have escalated and the need for affordable housing has gone up, we have seen OHCS work with developers and architects to allow for thoughtfully individualized variances to their standards to respond to these conditions, but they are careful to protect livability.

We have done careful studies in the past to test how much square footage we can reasonably take out of the unit and still leave it quite livable. On a recent project called Wy’East Plaza, we went as far as building a full-size one-bedroom unit mock-up that we fully furnished and then invited all the stakeholders to tour as a way to test and demonstrate livability. LIHTC projects must comply with national accessibility standards in kitchens and bathrooms, so those can only be reduced so far. That leaves the living/dining rooms, bedrooms, and circulation areas as the design challenge for how we thoughtfully compress those spaces to reduce overall project costs.

Clearly, standards are being arbitrarily driven by regulators at the state level. It is hard enough to assemble the capital to build a LIHTC project, but turning that capital into housing is just as challenging. It wasn’t until years after I had completed it, that I realized the 43-unit LIHTC project I worked on a decade ago, could have benefitted from smaller unit size. That thought never crossed my mind. It wasn’t until the Seattle City Council decided to regulated away smaller units being demanded in the market by real people wanted less space, proximity to busy neighborhoods and transit, and lower rents.

The canard that drives regulators, is that smaller spaces aren’t “livable.” On its face this claim by angry neighbors who opposed microhousing, is absurd. What’s less livable, a smaller apartment that is affordable, or a larger, more expensive apartment a long, costly commute away from work and friends? Worse, how about no apartment at all? The resistance by OCHS to slightly smaller units out of fear of developers “packing too many people into too small of spaces,” means more expensive, and fewer units of housing. Then when there is a shortage of those units, what’s next is a panicked call for more money, and more tax credits.

But Ankrom Moisan did something compelling, trying to show through the mock up, that this fear is groundless. Most consumers – whether of subsidized or market rate housing product – would rather have smaller space than no space at all. Kelley brought up a point that challenges my longstanding notion that size should be a driving factor; Covid changed how people live and work. There was a time, before the pandemic, when unit size was dropping because apartment dwellers spent more time at work and with friends than in their unit. After Covid, people learned that they could work at home, and that seems to be driving larger unit sizes again.

In the end, the design community can help make these points and respond to the market. But it will likely require action at the federal level to change the incentive structure of the LIHTC program. Subsidized residents may not pay more in money, but they often pay more in time for what they want in terms of location and use in the housing they seek. The Congress should press for more efficiency and sensitivity to consumer and community demands. We’ve suggested this at Foundation for Research on Equal Opportunity with a slate of reform ideas. Smaller, more efficient units, could be part of the result of requiring better use of the tax credit and reforms on land use and zoning regulation that drives up housing across the housing economy.