Inclusionary Zoning, Madison's well-meaning program to increase the supply of affordable housing, has had a starkly perverse impact on the local housing market: Vacancy rates have declined and rental rates have increased, producing exactly the opposite effect that IZ advocates wanted.
How bad have things gotten?
With its complicated formulas and heavy-handed regulation of developers, Madison's Inclusionary Zoning ordinance has managed to blunt the national trends that were dropping rents and increasing housing choices.
In the wake of the Sept. 11, 2001, terrorist attack, the Federal Reserve Bank lowered short-term interest rates while long-term mortgage rates (for other reasons) also declined significantly. This set off a huge housing boom between 2002 and early 2006.
Those lower interest rates made financing a single- family home affordable for millions of Americans who otherwise would have continued renting apartments. In fact, home ownership shot up to 70%, a historic record.
Consequently, with home ownership now so affordable, Madison experienced high vacancies in apartments. Local landlords responded by offering, for example, two months' free rent with a 12-month lease plus other incentives. Many apartment complexes experienced 25% vacancies during this period, a historical anomaly in the usually balanced apartment market in Madison.
It was a great time to be a renter, and a bad time to be a landlord.
Three years later, the situation has dramatically reversed itself. Landlords are smiling thanks to Inclusionary Zoning. Vacancies are down to single digits, lease incentives have all but disappeared, and rental rates are headed upwards in Madison.
Why? Because IZ has scared away apartment developers from Madison.
When I analyzed the city's building permit data, I found a significant decrease in the number of market-rate apartments built during the three years since the IZ ordinance was passed in January 2004.
In the pre-IZ period of 2001 to 2003, developers built 3,257 housing units (of all types) in Madison, compared to only 1,954 units from 2004 to 2006. That's a 40% decrease in the IZ era.
Only two market-rate rental buildings with IZ units have been built, and both were for student housing. The other new apartment buildings have either been exempted from the IZ requirements or paid a fee in lieu of providing affordable units.
Think about that: No non-student, market-rate apartment projects with affordable IZ units were built from 2004 to 2006. More interestingly, when you adjust the building-permit data to remove exempted projects (such as student housing; low-income, nonprofit elderly units; Section 42 low-income units, and projects under 10 units), the numbers are even more telling.
In 2006, Madison issued only 143 permits for market-rate apartment units, down from 660 in 2003, the year before IZ was instituted. That 143 number is incredibly low when you consider that the city has on the average annually issued permits for 807 units since 1993, the vast majority of which were market-rate units.
The facts don't lie: Madison's Inclusionary Zoning ordinance has caused a significant decrease in the number of market-rate apartments being built in the city.
For this, Madison's existing landlords should thank Mayor Dave and the Progressive Dane council members who championed Inclusionary Zoning. The dramatic downturn in new construction has caused vacancy rates to decline in existing units and net rents to increase.
In short, Madison renters are paying a steep price for the failed social engineering of Inclusionary Zoning.
As a result of the IZ ordinance, there are now very few developers willing to put up with city hall rigmarole to build apartments in Madison, even though a state appellate court in November 2006 overturned the IZ ordinance as it pertains to rental units. The court slammed it as an illegal form of rent control.
Leery of being ensnared in Madison's ill-considered do-goodism, developers are increasingly looking to build in the suburbs. This turn of events will lead to more sprawl, more traffic congestion and more air pollution. Not to mention less density in Madison, which will make it more difficult to support mass transit, including the mayor's trolleys!
Madison's Inclusionary Zoning ordinance has, in the end, proved to be little more than a political charade that has not only failed to accomplish its objective, but has worsened the local housing market. It is a do-gooder mandate gone bad.
CITIZEN IS A FORUM FOR ISTHMUS READERS. TERRENCE WALL IS PRESIDENT OF T. WALL PROPERTIES AND PRESIDENT OF THE BUSINESS-MINDED GROUP SMART GROWTH MADISON.