Policymakers push for solutions amid uncertain future of cities

Generation-defining challenges — including housing affordability, how to adapt to climate change and the bottoming out of commercial real estate in the wake of the pandemic — paint an uncertain future for many American cities.

“American cities are facing significant challenges, including currently housing affordability, the post pandemic recovery, economic development, climate resilience and infrastructure decay. Additionally, ensuring equitable resource distribution and inclusivity remains a critical issue,” Gabriela Fernandez, adjunct faculty professor at San Diego State University and director of the Metabolism of Cities Living Lab, told The Hill.

Of the 1,909 cities with populations of 20,000 or more last year, around half saw their populations decline since April 2020, according to the latest Census Bureau figures, including the country’s three largest cities: New York, Los Angeles and Chicago.

“Most California members, like myself, will tell you that one of the biggest challenges facing our cities is the housing crisis. And it’s not just LA — a growing number of my colleagues from both sides of the aisle and from across the country agree that homeownership is out of reach for too many and rent costs are too high,” Rep. Jimmy Gomez (D-Calif.) told The Hill.

One of the key problems facing the country right now is a housing shortage, especially housing for low- and middle-income families.

The U.S. housing shortage ballooned to 4.5 million homes in 2022 from 4.3 million in 2022, according to a June report from the real estate marketplace Zillow. Growth in the number of families also outstripped new housing units by around 400,000, deepening the deficit and contributing to the housing affordability crisis.

"We overbuilt leading up to the financial crisis, and then tore down a lot of structures. Now we're undersupplied,” said Peter Carroll, a public policy and industry relations executive at the property analytics company CoreLogic and former assistant director of the Consumer Financial Protection Bureau’s Office of Mortgage Markets.

Local, state and federal leaders have been scrambling to find solutions policies to make their cities a better and more affordable place to live.

One solution? Low Income Housing Tax Credits

One of the solutions being advanced is the Low-Income Housing Tax Credit (LIHTC), which the Housing and Urban Development Office of Policy Development and Research calls the “most important resource for creating affordable housing in the United States today.”

The federal government provides state and local agencies with billions of dollars each year to allocate as LIHTC to acquire, rehabilitate or build rental housing for lower-income households.

At a time when some Republicans want to make deep cuts to the federal budget, it’s telling that members of Congress on both sides of the aisle want to expand the LIHTC.

Rep. Suzan DelBene (D-Wash.) introduced the bipartisan, bicameral Affordable Housing Credit Improvement last May with Rep. Darin LaHood (R-Ill.). The legislation increases the per capita dollar amount of the LIHTC, ups the minimum ceiling to qualify and increases state allocations of credit funds, among other provisions.

“I’ve visited properties financed by LIHTC in cities like Seattle, Bellevue, and Everett, and in smaller communities that similarly struggle with access to affordable housing. That’s why my proposal to create 2 million additional affordable homes has such strong bipartisan support,” DelBene, who chairs the Democratic Congressional Campaign Committee (DCCC), told The Hill.

*Construction workers build new homes in Philadelphia on April 5, 2022. (Matt Rourke, Associated Press)*

Property tax abatement

With borrowing costs recently at 23-year highs, it can be hard to entice developers to start new projects or entice buyers to purchase new homes or invest in improvements.

One of the ways local governments are incentivizing real estate development and home ownership is through property tax abatement, which reduces or eliminates taxes in specific areas for a certain period of time.

“Property taxes have been increasing significantly in many markets,” Carroll said, adding that property tax abatement can help “get projects get off the ground.”

Several major U.S. cities offer some form of property tax abatement program, including Cleveland; Des Moines, Iowa; Portland, Ore.; and Philadelphia.

After Philadelphia enacted a 10-year property tax abatement program in 2000, the average number of residential building permits in Philadelphia County tripled to 1,550 per year from 2000 to 2008 compared to the previous decade, according to a report released in March by the American Enterprise Institute (AEI) Housing Center.

While volume dipped to about 1,000 in 2009 and 2010 following the financial crisis, the AEI report found the decline was “much shallower” in Philadelphia compared to the rest of the country.

Critically, AEI found 80 percent of new townhomes built in Philadelphia since 2003 were built on vacant lots or replaced decrepit buildings, which means “very few occupants were displaced by the construction of tens of thousands of new townhomes.”

Philadelphia started phasing out its property tax abatement program in 2022 after a brief delay.

Joey Chilelli, managing director of real estate firm Vanbarton Group, heads for an interview inside his company's high rise in Manhattan's financial district, undergoing conversion from commercial to residential apartments on April 11, 2023, in New York. (Bebeto Matthews, Associated Press)

Commercial to residential conversion

Amid concern over housing supply, there has been a push to transform offices, many of which sit empty as workers have been slow or not returned since the pandemic changed the way Americans work, into residential space.

About 12,700 apartments were created in buildings originally built for other purposes such as offices or hotels in 2023, an 18 percent jump from around 10,800 the year before, according to RentCafe.

But even as the idea has gained steam, developers have complained about zoning hurdles and renovation burden that sometimes mean it’s easier for a developer to just tear the building down and start from scratch.

It also presents a double-edged sword to cities that need both more housing supply and the higher tax rate they can rake in from commercial versus residential properties.

But some cities may have few options. Washington, D.C., for example, has struggled with slow or nonexistent return to office that’s strained the once-vibrant downtown.

The downtown commercial office vacancy rate was 22 percent in 2023 and the retail vacancy rate was 25 percent, more than double the 10 percent vacancy rate in 2019, the year before the pandemic, according to the DowntownDC BID’s annual State of Downtown report released in May.

Matt Bell, a professor of architecture at the University of Maryland, told The Hill that “one of the challenges DC has been the design and use the quantity of open space downtown.”

With few options to expand into federal land such as the national mall but plenty of vacant office and retail space, office-to-residential conversion is one potential solution in the city’s Downtown Action Plan.

“Not every office building is a good candidate for transformation because of the costs and some of the technology involved but I think if there was more robust tax credits, we'd see more of that and it would have a very positive impact on town to get more people living downtown, which I think would be very good for livability of the city,” Bell added.

Inclusionary zoning

As cities look for ways to attract more development and revitalization, how to ensure lower- and middle-income households can afford to live there is an ongoing debate.

Inclusionary zoning, local policies that require developers to set aside a certain portion of new rental units for low-income families, is one solution cities have turned.

“Cities are now looking at inclusionary zoning laws, where local governments can mandate that a percentage of new housing developments be affordable for low- and middle-income residents,” Fernandez told The Hill.

Fernandez pointed to Seattle as an example of a city that has effectively used inclusionary zoning. She also told The Hill that, according to the Metabolism of Cities Living Lab data, “Seattle's inclusionary zoning and property tax abatements have increased affordable housing stuck benefiting a diverse population.”

“That's something quite unique and important. The city's efforts to build up zone areas near transit hubs have encouraged denser, more affordable developments, also ensuring equitable access to housing and transportation,” Fernandez said.

But inclusionary zoning comes with tradeoffs and criticisms.

An April report by the University of California, Los Angeles, Lewis Center for Regional Policy Studies and published by the Terner Center at the University of California, Berkeley, studied the impact of the Los Angeles’s Transit-Oriented Communities program found that “poorly calibrated [inclusionary zoning] policies” that place too much of a mandate on developers can lead to lower production of low-income housing over time.

“Increasing the affordability requirement from 0 [percent] to 1 percent has a dramatic impact on market-rate housing production, which falls by approximately 71,400 units,” wrote Shane Phillips, the author of the study and the housing initiative project manager at the UCLA Lewis Center for Regional Policy Studies.

Although the decline of the number of market-rate units continues after 1 percent, Phillips found that decline is less steep. Each percentage point inclusionary zoning requirements increase between 1 percent and 16 percent saw a reduction between 4,600 and 11,900 in market-rate units, the study found, and production is cut nearly in half at 17 percent.

The AEI Housing Center argued in May that the benefits of inclusionary zoning are often overshadowed by drawbacks, including higher prices for new market-rate units, suppressed housing supply and ultimately undermines its position that “building more supply may be the only effective way to reduce the pressure that is driving up rents and producing displacement.”

Phillips concludes that “the costs of [inclusionary zoning] are both higher and more regressive than the alternative."

"Different tools have different strengths, and land use policy may be best suited to improving affordability in the wider housing market, while public subsidies are best for producing below-market homes,” Phillips concludes.