Does a Housing Shortage Justify Upzoning? Surprise: We Don’t Have One

By Peter Dorfman

Bloomington’s administration has tried just about every conceivable rationalization for upzoning the city’s  dense core. “Walkability to downtown” didn’t overcome constituents’ objections to the plan in 2019. Nor did Bloomingtonians buy into the pretext that an influx of market rate apartment development would generate new affordable housing. The city’s own planners regularly admit that it won’t. The suggestion that maintaining  single-family zoning is unsupportive of racial justice rightfully offended many residents. 

The administration’s overriding message is that the City of Bloomington urgently needs lots of new housing — principally rental housing — even if it isn’t affordable. But does Bloomington have a housing shortage at all?

It is heretical to ask the question because it’s become an article of faith across the country that every city has a housing shortage (and many, indeed, do). But on close examination, the evidence for this particular supposed shortage in Bloomington is shaky at best. 

Does Bloomington really have a housing shortage? Click here to download an independent research study that explores the question and argues for greater data transparency in policy debate.

Why Doubt the Housing Shortage Claim? 

Where is the evidence that Bloomington is in urgent need of more rental housing? City planners probably would point to the city’s 2020 Housing Study and its estimated annual growth rate, but the study is unclear about who  was included, and where its figures come from, especially Bloomington’s occupancy rate, and how such values were calculated.

And the study looks at housing growth only within the city of  Bloomington. It doesn’t take into account Monroe County’s rental housing inventory, which has grown by more than 1500 in the past 2 years. 

How is the county’s housing inventory relevant? Because the city and county are one workforce. Just as solutions proposed for climate mitigation must be regional in their focus, so must the arguments for increasing rental housing supply within the city be based on a recognition of the large number of people who commute daily between the county and the city. Any assessment of housing occupancy and needs should include both city and county inventories because both locations (and both Plan Commissions) serve that same single workforce. 

The city is projected to need somewhere between 5000 and 5500 new housing units between now and 2030. That’s from several different sources, including the ROI Uplands Regional Housing Study. 2030 is nine years from now. If you review the recent approvals for new construction, in the city and in Monroe County, we’re actually ahead of schedule to meet that demand.

What about the effects of building on affordability? 

The argument for affordability rests upon hazy notions of supply/demand. It’s what the city always defaults to as a justification for building ever more housing, fast. But upzoning raises land costs, new construction is more expensive than old, and if supply were to reach a level to cause rents/sales pricing to soften significantly, builders will stop building. Investment dollars leave. That’s the new world of investor-dominated capitalism.

The structures they leave behind — and their now fallen values — become the taxpayers’ burden to carry forward. It’s impossible to build enough of an oversupply to significantly lower sales/rental pricing in a demand  environment; such dramatic price lowering can only be the result of a catastrophic event, such as we’ve seen  with rental price drops of 20% in cities like Los Angeles or Boston due to people fleeing the cities in favor of the suburbs  during the pandemic. Housing pricing is simply not very sensitive to changes in supply.  

The city’s efforts to encourage the building of many giant, amenity-filled complexes 1+ mile from campus has been articulated as a strategy to attract student rental away from core neighborhoods. But occupancy rates in these complexes generally are significantly lower, despite their lower bed pricing, than in core rental homes

What is Upzoning Really About? 

If Bloomington isn’t really short of housing, what is behind the upzoning proposal? There’s another reasonable — and simpler — explanation: To expand the tax base.

Bloomington is a small town with a thin employment and industrial base. Beyond IU, the largest employer, Bloomington has a small life science industry, but it is concentrated out in Monroe County, and the city has  never shown it a compelling reason to move operations into the city. Catalant and Tasus, prospective anchors  of the Trades District on North Rogers, backed away from plans to build office capacity there.

The city and local technology industry cheerleaders have argued that Bloomington could have a rebirth as a micro-Silicon Valley, focused on ideas coming out of IU’s School of Informatics. IU’s venture funds and the  Dimension Mill (the start-up incubator in the Trades District) have spawned some new companies, but the city’s thin technology talent pool and low wages have made it difficult for entrepreneurs to grow them into real  businesses here.

The pandemic has, of course, depressed the city’s retail and hospitality industries and put the brakes on business development of all kinds — all the more reason to slow down development until a more  realistic picture emerges. 

What, then, does Bloomington have to sell that the rest of the country is buying? It has a real estate market where residential rental demand has been constant, rents have consistently risen,  and property values have shown consistent historical growth, the pace of which is accelerating. Bloomington is  ripe for predatory investment in private equity-backed rental housing development because of its strong rental growth history and its perceived stable market. But equally important, when viewed within a national pricing  context, Bloomington’s core housing is a bargain. Investment cost versus return is extremely favorable.

But there is significant danger in building too much, too fast. Overbuilding can lead to underutilized structures. Such structures consequently lose assessed value. This can depress the tax base while infrastructure  maintenance becomes a greater burden for residents/employers (who are forced to pay for the upkeep on  unoccupied properties).

A city becomes fiscally weak if its expenditures exceed its revenues. Ultimately, if a city can’t pay its bills, its bond rating drops — it is considered a poorer risk to lend to. That discourages  business development, not just because of a less certain business environment, but also because it raises the  cost of credit and limits what enticements the city can offer potential employers. 

Amenities — like parks, bike paths, tree planting, alley improvements, golf courses, etc — are expensive to maintain. Bloomington’s administration has expanded them. They attract investment to the City (and leverage federal money), and are assets for the residents. But what if expected new investment doesn’t follow? What if  something happens — like a pandemic — that eats away at the funds that were to pay for the already committed structures — like the Convention Center expansion? What if the tax base doesn’t grow enough through the revitalization of business to support them? Picture an overfilled balloon. 

Unless property values can be raised. 

Remember that the mechanism of upzoning raises the value of land, so results in a rise in assessed value; such increased assessment is reflected by a commensurate rise in property taxes. 

Could upzoning be simply an expeditious way to increase the tax revenues of a city that has been too aggressive in its building goals? Viewed through this lens, the city’s openness to equity-backed development becomes  clearer. 

Investor-backed development groups securitize their investments, usually within the first year. The ultimate profit comes from breaking their initial investment into resalable pieces, marketed to new investors, like shares of stock. They can make contributions to the “Affordable Housing Fund” because such contributions are a  minor expense, dwarfed by the securitized investment returns. Should the development’s value drop, the  original investor group will have already walked away. This is how housing financialization works.

Perhaps the paradigm at work isn’t about growth. Perhaps upzoning isn’t being proposed to encourage building, but instead is being proposed as a hedge against overbuilding. Is Bloomington overbuilt, both in terms of housing and amenities, with too low a tax base to support itself going forward? 

Raising the tax base can be accomplished in a number of ways:

  • Annexation — With the recent court case decided in Bloomington’s favor, this is probably coming. (There is substantial opposition in the county.)
  • Raise Local Income Tax — The administration tried last year, but it failed. 
  • Raise any other local tax — Difficult legislatively and at great political cost.
  • Raise tax on business — Counterproductive because business is already shrinking/lacking.
  • Raise property tax — Feasible. Indiana has a cap on the potential increase, which limits the amount that could be raised simply by raising the rate. But there is no cap on assessments. 

The city could raise assessments citywide, by individual property. But this is labor-intensive, as it requires a property inventory and individual decisions can be appealed. The city usually has to defend increases, e.g., by citing surrounding property sales price increases. 

An alternative that avoids all the individual assessments and options for appeal is to boost assessments through zoning. Upzoning injects more speculation profit into the neighborhoods which raises the prices of properties. It also creates a strong incentive for rental development — the city can tax rental properties at a higher rate than owner-occupied properties. Upzoning also immediately raises land values. It raises assessments by zone, rather than by individual structure. And it lets the market determine the amount of increase. 

If the areas that are already most profitable — and so contribute the highest tax payments — are upzoned, then the city receives the highest benefit possible. 

In terms of the cost to acquire Bloomington properties for purchase and conversion to rental and the rate of return on investment, that would be the 5% of the city we refer to as the core neighborhoods. And the potential profit for investors becomes at least twice as compelling if they can double their rental income streams by duplexing the houses they buy. 

Is this the logic behind Bloomington’s upzoning?

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