The nation’s capital is gentrifying – right before our eyes. The high home prices that once largely existed west of Rock Creek Park are spreading eastward. Some of the neighborhoods that used to be affordable and working class—think Columbia Heights or Shaw—are now full-throttle luxury zones, where homes sell for $700,000 and much of the former population has been pushed out. Other neighborhoods east of these, such as Park View or Kingman Park, are beginning this gentrification process, with values increasing by six-figures in the past calendar year. Those areas seem primed to become the Shaws of tomorrow. And at the rate things are going, southeast Washington could in a decade do what was once unimaginable and also gentrify.
It would be hard to stop this phenomenon – DC’s current economic climate as a government industry town means people and capital will continue to flood in while its regulatory climate of restrictive zoning perpetuates the housing shortage and inflates prices. Nor would the city necessarily want to stop gentrification – inbound wealthy residents mean more money for local services.
But what if there was a way to build affordable housing now—and keep it affordable—so that lower income groups can remain in these neighborhoods even after they gentrify? One recently-launched program here called the Washington Housing Initiative (WHI) looks to achieve that goal.
High Impact Areas
WHI was launched this past May, and will build or preserve between 2,000 and 3,000 units in the Washington, DC region. The program is a collaboration between the Federal City Council (FC2), a local business and civic organization; and JBG Smith, a large, Chevy Chase-based real estate investment trust with a current and future portfolio of 38 million square feet. WHI’s units will be designed as workforce housing that provides subsidized rents for those making 60 percent of area median income, or between $60,000 and $70,000 annually. The units will go in neighborhoods that are about to gentrify, which the program refers to as “high impact areas.”
“Those are places,” said AJ Jackson, vice president of social impact investing for JBG Smith, “where we see significant likelihood of private investment and development pressure, not in the immediate term, but for the next five to ten years.”
Locations that fit this description, and where WHI looks to develop, include nearby suburbs and pretty much any neighborhood in the core city east of Rock Creek Park, even spreading across the Anacostia River. The projects will be developed, owned and operated by the Washington Housing Conservancy (WHC). This is a new, independent nonprofit organization that FC2 set up and helped to fundraise for. FC2 will advise WHC on which projects to focus on, based on existing needs in the DC community.
The projects will have a high-density, mixed-use quality – the housing component will include the subsidized rents for DC’s workforce, much of whom can no longer afford to live in the city. The retail components will also be geared towards these lower-income workforce groups. For example, rather than leasing the space to corporate banks or pharmacies, said Jackson, space may be leased to health and social service agencies that help the tenants.
While WHI will involve some new development, Jackson said that for financial reasons, the projects will mostly preserve and cap the rents of existing affordable units. After all, he said, the preservation process is relatively cheap, mostly requiring basic redecorations and repairs. But when old buildings are replaced wholesale with new ones, project costs significantly increase because of the demolition and redevelopment process. It is hard in that latter case to generate affordable units.
Need for Philanthropy
But even preservation will require some philanthropic financing strategies, since affordable housing and missionoriented retail aren’t exactly market outcomes in today’s DC. The strategies that WHI housing will require can be broken down into three separate capital streams.
One source of capital will come from traditional investors who expect market-rate returns of around 8 percent, said Jackson. A second financing source will be equity capital, which is philanthropic money that was donated to FC2, and funneled into the WHI program. The rest will be social impact capital that arrives via an “Impact Pool” managed by JBG Smith. Investors into the pool will receive capped returns. Proceeds from the investment that exceed this cap will be used to keep housing rents low, or fund the aforementioned neighborhood services.
A majority of this impact pool money will be from outside investors, although JBG Smith is investing some of its own funds. The financing will be secondary, including junior mortgages or mezzanine debt, and is expected to have a two percent current yield, an eight percent total yield, and a term of up to ten years. As with most social impact investing, IRIS will be the metrics system used to determine whether the money is achieving the desired social outcomes.
The money generated from these sources will be funneled into WHC, to manage the 2,000 to 3,000 units. Of course, this is a fraction of the affordable units that DC actually needs, and no one organization could build to those needs by itself. DC proper adds over 10,000 people annually, which is a radical shift from previous decades, when it perpetually declined. The metro area growth since 2010 is about 83,000 people annually, which is sixth among U.S. metros. As I wrote recently, the multi-decade growth of the federal government makes the metro persistently rank high in job growth, wage growth and median household income. According to a 2015 analysis by the DC Fiscal Policy Institute, the apartments charging $800/month rent or less declined by 42 percent in DC between 2002 and 2013.
But WHI’s contribution is at least a start, said Kevin Clinton, chief operating officer for Federal City Council. “We see housing affordability as one of the threats to the city’s continued vitality [and] a threat to residents’ ability to benefit from neighborhood improvements.” WHI will target the gentrifying, high impact areas where this threat is the worst.
[This article was originally published on HousingOnline.com.This is part of an ongoing monthly cross-country series profiling America’s Progressive Developers. Here are the pieces on Charlottesville, Miami, New Orleans, San Antonio, San Diego, San Francisco and Detroit.]
Scott Beyer owns and manages The Market Urbanist.
Market Urbanist is a media company that advances free-market city policy. We aim for a liberalized approach that produces cheaper housing, faster transport and better quality-of-life.
Market Urbanism is a theory calling for free-market solutions to urban problems. Rooted in classical liberalism, it posits that cities work best through the bottom-up, private sector activity of many individuals, not top-down government plans. In this nifty guide, Scott Beyer describes how these free-market ideas can apply to housing, transport and public administration. You can purchase the book (including one signed by the author) below.