Subject
title
Housing Strategies Work Session: Supply
end
Department
Housing and Community Development
Recommendation
Staff recommends that the Mayor and Council receive the presentation, discuss, and provide direction on their priorities for strategies related to increasing the housing supply.
The following feedback is requested from the Mayor and Council to guide next steps:
• Do you agree that the identified strategies are the most important to increase housing supply?
• Do you support strategies outlined for ZOR/FAST II and the Town Center Master Plan?
• Do you support the proposed areas for exploration to the MPDU Ordinance?
• Do you support efforts to limit the impacts of short-term rentals and house flipping on the housing supply?
Discussion
Purpose
The purpose of this work session is to provide the Mayor and Council with an overview of strategies, policies, and programs that the city can pursue to address low housing supply and for staff to receive direction for their work. This is the first of three housing work sessions focusing on supply, subsidy, and stability strategies.
Housing Supply Background
Housing supply refers to the quantity of residential units available in the market. It is directly linked to housing affordability, economic growth, and access to essential resources. Increasing housing supply, particularly in high-opportunity areas like Rockville, can lower rent growth and improve access to education, transportation, and jobs. Housing supply, including current development trends and regional goals, is discussed more extensively in the June 3, 2024 housing briefing staff report <https://rockvillemd.gov/AgendaCenter/ViewFile/Agenda/_06032024-7207>.
Rockville has the zoning in place to permit thousands of new residential units. Currently, the city has over 6,000 new residential units in the pipeline. If all these new developments are built there would be over 1,000 new MPDUs. The strategies in this staff report address ways to potentially speed up the production of these units and lay the foundation for future developments.
New housing supply is most immediately beneficial to moderate- and high-income households but
recent research has found an overall positive effect on housing prices for low-income
households as well. The chain of residential moves brought about by new housing relieves
competition for existing homes, which can drive up the price of previously naturally occurring
affordable housing. This concept is commonly referred to as filtering. The Federal Reserve Bank
of Minneapolis found that for every 100 new market-rate apartments, there are an estimated
70 new openings for renters in lower-income neighborhoods.
In August 2024, researchers at the UCLA Lewis Center for Regional Policy Studies conducted a review of recent academic literature on neighborhood-level impacts of market-rate housing development. Five of the working papers find that market-rate housing makes nearby housing more affordable across the income distribution of rental units, and one working paper finds mixed results. The researchers caution that market-rate development should still be prioritized “in higher-resource communities where the risk of displacement and other potential harms is lower, and complementary policies such as tenant protections and direction publicly investments remain essential.”
The following are strategies related to housing supply under consideration.
1. Zoning Ordinance Rewrite (ZOR)/FAST II Initiative:
The ZOR, currently in progress, will implement the goals and policies of the Rockville 2040 Comprehensive Plan, Climate Action Plan, Pedestrian Master Plan, EV Readiness Plan, and Town Center Master Plan. The project encompasses the FAST II (Faster, Accountable, Smarter, and Transparent) initiative to streamline the city’s development approval process and is being led by city staff supported by a consultant team. Staff anticipates its completion in Winter 2025.
The ZOR addresses the bulk of the most critical housing supply strategies, such as through:
• Rezone certain single-family zoned areas for small multi-family housing types
• Increase building heights in infrastructure-rich areas
• Streamline the development review process
• Provide applicants for new housing developments with speed, predictability, and certainty with administrative approvals
• Reduce and/or eliminate parking requirements near transit-rich areas
• Make office-to-residential conversions easier
2. Moderately Priced Dwelling Unit (MPDU) Ordinance:
The MPDU ordinance requires certain developments to set aside 15% of units for moderate-income households. This policy is the source of almost all new income-restricted affordable housing in the city. However, it also impacts market-rate development, and many components of the current ordinance have been identified in the Comprehensive Plan and by staff as outdated, unclear, or not in the best interest of the program’s objectives or overall city objectives.
As a part of a comprehensive ordinance update, staff will research national best practices and review academic literature related to inclusionary housing programs. Below are preliminary items for consideration that staff intends to further develop before officially recommending as part of the ordinance update:
• Clean-up outdated, unclear, and counter-objective components
• National best practices and recent research
• Length of homeownership term
• Program agreement approval process
• Density bonuses
• Flexibility for over-income tenants
• Fee reductions
• Income averaging
• Property tax exemptions
• Ensure equality with market-rate units
3. Town Center Master Plan:
As Rockville’s “downtown,” Town Center is critically important as a hub for compact, transit-oriented growth. The Town Center Master Plan is an update to the 2001 master plan and envisions encouraging significantly more residential units within the Town Center, although zoning changes will not take effect until the ZOR is approved. The following action items in the draft master plan directly relate to stimulating housing supply:
• Focus on flexibility and administrative approvals
• Straight-forward urban design standards
• Bonus height program for projects with 20% or more affordable units
• Target sites for more intense residential development
• Encourage redevelopment of Rockville Station property into housing
• Amend parking requirements to reduce development costs
4. Housing Needs Assessment:
A housing needs assessment is a detailed analysis of a community’s demographic, economic, and housing market conditions and informs future housing strategies. Staff are particularly interested in a housing needs assessment to examine the following things:
• Households and housing demand forecast
• Inventory of available land supply, including publicly owned land, institutional land, places of worship, and vacant and underutilized land
• Properties underserved by infrastructure, such as sewer
5. Limit Supply Loss
a. Regulate Short-Term Rentals:
Short-term rentals have been found to reduce the overall housing supply, leading to increased rents and housing prices. The Mayor and Council and Planning Commission are currently in the process of reviewing zoning and code amendments that would legalize short-term rentals as a conditional use. Once this is complete, the Mayor and Council may want to consider measures to limit the proliferation of short-term rentals.
b. Flipping/Teardown Fee:
There is a growing phenomenon of taking smaller, older, more affordable single-family homes and replacing them with larger, newer, and more expensive single-family homes. This process is commonly referred to as “flipping” and the new homes as “teardowns.” To disincentivize this activity and support affordable housing programs, some jurisdictions have introduced a teardown fee. We will include a discussion about this in our subsidy work session next month.
c. Preservation of “Naturally Occurring Affordable Housing”
Because of increased housing demand and land values, there is pressure to demolish older market affordable apartment complexes and redevelop them into high-end residential communities. Staff recommends identifying specific land use recommendations that would facilitate the preservation of market affordable housing.
6. Accessory Dwelling Units (ADUs):
Many cities that have successfully used ADUs as a housing supply strategy support their construction through various programs. For example, Los Angeles’ ADU Accelerator program helped to increase ADU permits from fewer than 5,000 in 2017 to more than 23,000 in 2022. Ideas for programs include:
• Financing guides and building relationships with local banks
• Pre-approved construction plans to speed ADU building permit approval
• How-to guides and educational materials
• No- or low-interest loan programs for qualified owners
7. Housing on Religious, Private Educational, and Public Lands:
Many places of worship are interested in using excess land for mission-based purposes, such as affordable housing. However, they face barriers to constructing housing due to current zoning and development standards. Both the State of California and Montgomery County, Maryland are examples of places that have amended laws to allow religious and other institutions to build housing. A housing needs assessment would be able to take stock of the properties in Rockville where the city may want to seek partnerships with property owners for affordable housing development.
8. Small-Scale Multi-Unit Housing Typologies in Single-Unit Housing Zones:
Many localities and states across the country have recently adjusted the zoning in neighborhoods that currently only allow for single-family detached homes to allow for more diverse housing types, such as townhomes, duplexes, and cottage clusters. These types of homes typically use less land or can split land and construction costs between more households, making home prices comparatively less expensive than a new single-family detached home. This strategy would go beyond the single-family properties that are envisioned to be rezoned to allow missing middle housing through ZOR.
9. Affordable Housing Requirements for Public Land:
When either constructing a new public facility or disposing of public land, some jurisdictions have a requirement that the development of housing, especially affordable housing, be considered. Land acquisition is one of the costliest components of housing development, so if these costs can be minimized due to its public ownership, that can act as a subsidy for the creation of affordable housing. Both Montgomery County, Marland, and Washington, D.C. require housing to be considered as a part of the public land disposition process and for the construction of new public facilities.
10. Land Value Tax:
Land value taxes are alternatives to the traditional property tax system, “in which property taxes are levied based only on the value of the underlying land and not on the value of any buildings or other improvements to the site.” This discourages land speculation, holding of vacant sites, and underutilization and encourages neighborhood revitalization and an increased supply of housing. In Maryland, municipalities can implement land value taxes, but counties cannot because state code permits cities to tax land and buildings at different rates.
11. Support for New/Emerging Small-scale Developers:
Small-scale developers are necessary to achieve more small-scale infill development. However, because small multi-family housing typologies have been largely illegal or discouraged, this industry is largely non-existent. Those small-scale developers who are in operation, especially developers from historically underrepresented groups, can face challenges in “qualifying for and securing equity and debt capital as well as perceived risk in real estate lending and investments.”
To address this, the City of South Bend, Indiana introduced the Build South Bend online toolkit, “designed to assist small developers with sourcing properties, performing due diligence, producing necessary permits, and more.” Austin, Texas has created a small developer training program.
12. Shared Equity Models and Land Banks:
There are several shared land ownership models that remove or diminish the profit motive, making housing more affordable. Examples of these include community land trusts (CLTs) and limited equity cooperatives. CLTs are typically owned by a non-profit organization that holds the land on behalf of a community so that homebuyers are only paying for the cost of the land. Housing cooperatives (co-ops) are similar to condominiums, but instead of owning a single unit within the property, the buyer owns a share of the non-profit corporation that owns the building. For a variety of reasons, co-ops typically result in lower housing costs than condominiums. Limited equity co-ops (LECs) provide even further affordability by having buyers commit to resell their share at a price that maintains affordability.
Although CLTs and LECs are typically owned or operated by non-profits or other mission-driven groups, the city may be able to support them through technical assistance, grants or loans, changes to certain policies, or programs like land banks. Land banks are public- or community-owned entities created to acquire, manage, maintain, and repurpose vacant, abandoned, and foreclosed properties. A land bank could partner with a CLT or LEC to create more affordable homeownership opportunities.
13. Public-Private Partnerships (P3s):
There are many public-private partnerships that the city can pursue to support housing supply. For example, staff are particularly interested in ways to support careers in construction and exploring pay-for-performance projects piloted by philanthropic and financial institutions. Other P3 opportunities include working closely with affordable housing developers and financial institutions to understand resource availability, needs, and gaps. This will be further addressed in the subsidy work session.
14. Reduce Construction Costs:
Increases in construction costs are one of the biggest drivers of growing housing prices. By supporting innovative new technologies like manufactured, modular, prefabricated, and panelized housing or nontraditional materials like mass timber, cities can cut the cost of building housing.
Mayor and Council History
Housing was selected as one of the Mayor and Council’s three priority areas. In June 2024, a high-level briefing <https://rockvillemd.gov/AgendaCenter/ViewFile/Agenda/_06032024-7207> was presented outlining the city's housing crisis and policy landscape.
Next Steps
Based on feedback from the Mayor and Council, staff will finalize ordinances, develop program(s), and bring them forth for consideration and approval.
Of the strategies discussed in this report, the Mayor and Council are scheduled to hold the following meetings:
• September 30, 2024 - FAST II Work Session
• October 7, 2024 - Town Center Master Plan Public Hearing
• October 7, 2024 - Short-Term Rental Public Hearing
As a reminder, on October 21, 2024, and November 18, 2024, the Mayor and Council are scheduled to receive similar work sessions on housing subsidies and stability, respectively.