As I concluded in Part 3, one big problem with the way inclusionary housing ordinances are typically analyzed is that they focus too much on local policy — in fairness, this is understandable; it is a local ordinance, after all — and not enough on how that policy fits within the larger labor market, which might encompass many neighboring cities. While it is true that cities can’t control the policies of their neighbors, nor can they either produce or constrain housing in such a way that it alone will affect the trajectory of the overall housing market, it is nonetheless very important to see how any particular policy stacks up to comparable neighbors.

And that’s because, as I noted earlier, developers can select from parcels with equivalent access to the same labor market. So that means, within any given labor market, they will choose a parcel in the city with the best mix of regulatory certainty and incentives, dead stop. 

This brings us to Costa Mesa’s proposed ordinance, and I shared these thoughts already with the Planning Commission. The fact that developers can choose parcels within whatever jurisdiction they’d prefer implies that less restrictive jurisdictions within the same labor market will experience better rates of development. And as I noted to the Planning Commission, this conclusion seems supported by the inclusionary housing literature:

For example, a often-cited paper by the NYU Furman Center for Real Estate and Urban Policy, The Effect of Inclusionary Zoning on Local Housing Markets, found that, when comparing the performance of inclusionary zoning in several jurisdictions in San Francisco, “…the number of units built increases with the presence of a density bonus and minimum project size that triggers [inclusionary zoning]. These results suggest that less stringent programs actually produce more affordable units, a plausible explanation if developers avoid jurisdictions with highly stringent programs” (emphasis mine). Another study from the Furman Center looked at “upzoning with strings” in Seattle, WA, an approach similar to what we are attempting here, also found that inclusionary zoning encouraged developers to relocate projects to nearby parcels that did not require inclusionary zoning, even if those parcels were not upzoned: “Our quasi-experimental border design finds strong evidence of developers strategically siting projects away from MHA-zoned plots—despite their upzoning—and instead to nearby blocks and parcels not subject to the program’s affordability requirements” (emphasis mine). 

So what does this mean for Costa Mesa’s ordinance? It means that, if we make the requirements too onerous as compared to our neighbors, it is entirely possible that whatever building our area can support will shift to other jurisdictions, just as it has in the areas studied in the research papers quoted above. And the effect may be more acute here because Costa Mesa is already in a tricky position when it comes to infill housing.

First, the legacy of Measure Y (something that deserves its own very long post, which I plan to do in the future) has interrupted the City’s development pipeline and left it without significant projects for the last seven years. That also means that developers have not been actively acquiring land during that time with the intent to develop it in the future, as our regulatory environment made entitling large projects functionally impossible. In fact, thanks to Measure Y, it is still impossible to pursue significant projects everywhere in the city except in the Measure K sites where this ordinance will apply. So if we get the entitlement incentives wrong, projects won’t just shift to other places in the city; they will shift out of the city entirely.

Second, the land uses that we do have tend to be profitable, going concern commercial developments, such as strip malls or car dealerships. Many of these were developed or changed hands many decades ago, meaning that there are now substantial tax advantages (thank you, Proposition 13) to holding these properties and simply churning rent or revenue. These “safe bets”, which likely are owned by investors at this point, are tough to part with. This is a substantial enough issue that, in the Agenda Report, the City staff admitted that it had to ask the consultant to do additional analysis on this point, and after it had done so, the consultant substantially lowered the recommended inclusionary housing requirement. Glad we double checked!

So with these dual headwinds, I fear that Costa Mesa’s development prospects will be very sensitive to additional onerous taxes, especially if those taxes can be avoided by simply moving to a parcel next door.

Of course, maybe we won’t get any housing production at all if the macroeconomics won’t cooperate. It’s pretty hard to get a project going when construction costs have increased 80%+ in the last three years and banks are now requiring 50% equity. Ouch.

I’ll wrap up in Part 5 with my concluding thoughts about IHOs over all. As you’ve probably inferred by this point, it’s probably not going to be very positive.