What's Blocking Housing Supply in Oregon? We Asked Mark McMullen of the Common Sense Institute.

In this interview, Mark McMullen, VP of policy and research at the Common Sense Institute of Oregon and former longtime state chief economist, discusses the major barriers preventing Oregon from reaching Governor Tina Kotsek’s goal of building over 30,000 housing units annually. McMullen identifies several key obstacles: complex zoning laws and slow permitting processes (especially in major metro areas), high systems development charges that burden developers upfront, restrictive post-financial-crisis lending standards that make land development loans expensive and hard to obtain, and elevated construction costs paired with high interest rates that make projects difficult to pencil out. He notes that while the 30,000-unit target may need to be revised downward due to Oregon’s stalled population growth and slowing in-migration—driven largely by housing affordability problems—a significant supply gap still exists. McMullen recommends that policymakers focus on removing regulatory barriers, expanding the construction workforce, and streamlining approval processes now so that development can ramp up quickly when market conditions improve. He also highlights that Oregon’s economy is shifting from one driven by population growth to one increasingly reliant on wage growth, capital investment, and entrepreneurship, and that housing affordability remains critical to attracting new residents and retaining younger generations.

Transcript#

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Greg Frick: Welcome back to Multifamily Market Watch. I’m Greg Frick, partner with HFO Investment Real Estate. Today we have with us Mark McMullen. He’s VP of policy and research at Common Sense Institute of Oregon. Mark, thanks for taking the time to come speak to our audience. For those that don’t know, what is Common Sense Institute of Oregon, also known as CSI and not the CSI on CBS? What is it? I mean, I know it’s kind of like a think tank, but tell me what it does.

Mark McMullen: The CSI on CBS is much more exciting, of course, than the data world.

Greg Frick: Well, they have like 90… yes. Yeah. They have how many versions of it? But yeah.

Mark McMullen: And so, yes, we’re a think tank and we operate in six states and really try to provide nonpartisan analysis, you know, facts-based stuff with kind of a free market angle on it. And so we study a lot of the policies that are most important to policymakers and firms and businesses across the country and really do try to boil down to the regional markets and talk about what’s happening in your neck of the woods.

Greg Frick: So there’s different Common Sense Institutes in different states?

Mark McMullen: Correct. That was set up about 20 years ago out of Colorado is the mothership, and since then they’ve expanded. In Oregon here, we’ve been around for a year and a half.

Greg Frick: Gotcha. Got it. And then your background, you were formerly the state of Oregon’s chief economist, I believe?

Mark McMullen: Yeah. Longest serving chief economist for the state of Oregon, either in acting or the permanent position, served under four different governors.

Greg Frick: Okay. So then for the research that you do at the institute, is it directed by policymakers of what they want to see, or is it more hey, we’re going to do research and give information to help kind of educate them on what kind of policies they should be making? Is that how it works, or…

Mark McMullen: Yeah. Well, we don’t really advocate for policy. So the idea is to give policymakers and other stakeholders just the facts on the ground so they can make the policy determinations that they consider. Now, how do we determine what policies we look at? Well, yes. Obviously, stakeholder input, input from our board, input from policymakers, all go into, you know, what appears to be most useful, where we could move the needle in the discussion.

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Greg Frick: Gotcha. Well, you know, one thing, you know, the current governor in Oregon came out with, you know, one of her, you know, I guess she ran on and one of her big things was, you know, getting upwards of over 30,000 homes or, you know, rental units built annually. And again, I’ve, you know, looking at the permit numbers and multifamily’s kind of our audience are, you know, down, you know, some historic lows. I mean, what do you see as, you know, some of the barriers that are keeping Oregon from able to even coming close to achieving that goal of over 30,000, you know, rental, you know, livable units developed on an annual basis?

Mark McMullen: Well, to start, it’s a lofty goal. We touched it, you know, briefly during the housing boom, you know, but this isn’t, you know, that would be a pretty aggressive number for what we’ve seen relative to what we’ve seen in the past. Now, the good thing or at least on the margins is that, luckily, that 30,000 number of units… not luckily but for some, you know, some good and mostly bad reasons, that’s probably going to need to come down and we’ll see that in the future housing needs analyses in so far as that number was put together before we saw the market conditions sour and before, you know, in terms of demand and of course before we saw a slowdown in our migration trends here into Oregon and so…

Greg Frick: So saying maybe that adjustment would have to be made based on the immigration trend slowing down so that demand may not be as high as, you know, what was forecasted when they put this number out.

Mark McMullen: That’s right. But it’s still going to be, whatever it is, it’s going to be an aggressive target because there still is this gap in terms of the supply of available housing of all types, multifamily and single family alike. And so, so what can we do? So the problem remains relatively the same. You know, I just needed to do this caveat in terms of the magnitude isn’t necessarily what it was in the past. But, nevertheless, there is still a hole in supply and, you know, what we really need to do policy-wise is set the stage so that construction can occur when the market turns around. Because right now, you know, the market is, you know, difficult dynamics with high interest rates, high construction costs, and that, you know, plays on both sides of the equation, you know, both in terms of the buyers and the developers. And so, it’s really difficult now with these dynamics to get things to pencil out. But once things do, you know, we need to have it so we can get things approved and inspected and, you know, up and running in a timely manner. And so, you know, given where we are in the cycle, I think that’s really where policymakers, you know, need to focus going forward. And so, obviously, what can we do? Well, I think most of the time, you know, it’s going to take, you know, all hands on board in terms of there’s no one silver bullet in terms of policy. You know, we have…

Greg Frick: Right. Of course. You know, so…

Mark McMullen: At first you’ve got the big bundle of, you know, zoning and permitting delays and the like and regulations, particularly in our biggest metropolitan areas where it’s difficult to get something approved. And so of course that big bundle, you know, no one silver bullet, but you know working on all of those angles is key. And then of course we have the issues across the state with the systems development charges. You know, to what extent, you know, and particularly in a high rate environment, we, you know, we’re asking developers to put forth a really big investment and it can be very hard for them to get the financing for that upfront, right, where in the past, you know, the public sector took a bigger role in that. In, you know, you know, before the housing crash, you know, there were much more agreeable… many localities to saying okay, we’d like to have development in our market and so we’re going to, you know, help these developers with some of these systems development charges. Well, attitudes towards that have changed drastically where now it’s very hard to sell homeowners and businesses in a market on additional development and that they would have to play a role in footing, of course. And then, a really big one is financing, which has changed drastically as well, you know, since the financial crisis and housing bust, right? And particularly these land development loans where they are no longer very easy to get and very expensive for developers, you know, and that comes from a couple of different angles. One was right away people and regulators would look down on lenders that had a whole lot of housing in their portfolio and so they…

Greg Frick: They’re asking for more reserves and asking for more…

Mark McMullen: That’s right. Right.

Greg Frick: Yeah.

Mark McMullen: And at the policymakers level as well in terms of, you know, regulating these loans, there were… became a lot more stricter and the lending standards became much tougher. And so, you know, that was a big wrench in the works. And so, you know, it came for a few years, it was only the very newest of the lenders who didn’t have a lot of legacy investments on their books for real estate that would do this. And so, it became really problematic to… one, in Oregon, we have, you know, all kinds of crazy zoning laws. And then two, you can’t get lending to develop the land and you can’t get, you know, the assets needed for the systems development charges. And so there are just these huge barriers to starting projects. And so, going forward, I think, you know, eating away at the edges of all of that, you know, trying to bring down costs in terms of promoting the construction workforce, you know, trying to, you know, lube up the system in terms of getting down our, all the barriers and the permitting and approval times and all of that. You know, potentially, you know, in, you know, seeding the local government workforces so that they have enough bandwidth, you know, to go ahead and process some of this stuff and hopefully move forward from there. And so, again, no one silver bullet, but if we can just get the, you know, get the soil ready for when the market turns around, because right now, obviously, it’s a tough time to get stuff to pencil out. But, if we can make it so that projects once they do start to look, you know, look profitable, that we can get them up and going as quick as possible, I think would should be the aim of policymakers at least in the near term.

Greg Frick: And then I was going to go back on kind of to the demand side. I mean looking at it and again you guys have, you know, different, you know, institutes in different states. I mean what’s your thought on the demand from the migration slowing down? You know, I always tell people, you know, in our world of multifamily we’re going to follow jobs, you know, as jobs come, that’ll, you know, increase the demand for housing. I mean, what do you see as some of the barriers to get that economic engine rolling again within this region, especially in compared to other states? You know, comparing, you know, because now we’re competing with Colorado and Utah and other areas. I mean, what, you know, when you put on your, you know, looking at it looking forward, what needs to get done to kind of rev that back up?

[00:11:30] Mark McMullen: Yeah, it’s a very interesting question in so far as right now we’re in this weird space where we’re not 100% sure what our future engine growth is going to be in Oregon. And what I mean by that is that we’ve been spoiled over the years in a way given that every time the U.S. economy is expanding we have outperformed in terms of jobs and labor force and population growth relative to other states. And so this has been, you know, a boon to us and has really pushed, you know, our above-average economic performance. Now, that said, of course, in the recessions, we’ve had really severe recessions compared to other states, but at least while things are growing, we were really pushed ahead by a lot of these migration trends and a lot of the performance of our resource and manufacturing industries that are very highly correlated with the national economy and with interest rates and the like. And so, and so this cycle in the last several years has been distinctly different. Not only have we had population stall for the first time since all the mills closed in the ’80s across the state, but we’ve also had income gains that have outstripped what we see in other states. So what we’ve been used to in the past has been a lot of population and labor force growth pushing us forward. And this time we didn’t have the population or labor force growth. But yet we’ve seen a lot of wage and income growth which, you know, is suggestive that we’re getting a lot, you know, that we’re really being… now what’s important more is investment and, you know, for, you know, and capital investment among across firms and increasing productivity, uh, more than the number of workers, which is not necessarily bad. If you look across the, you know, across the country, you know, slow population growth is not always a death now like it is maybe in the rust belt or the farm belt in the past, but there are a lot of the real high-flyers economically that do have slow population gains, you know, California, Massachusetts. So, it’s an open question whether or not we’re evolving into that sort of economy going forward. But I do think that certainly investment and working on, you know, our a lot of our startup industries to try to stimulate that, you know, activity rather than necessarily focusing our economic development dollars on, you know, the big fish, rather, you know, fertilizing innovation and entrepreneurship more broadly. And that because also we have a lot of folks that are in those millennial population ages that are becoming entrepreneurs and are, you know, creating the big anchor companies that we’re going to see in the future. So stimulating investment, you know, and stimulating entrepreneurship is number one, you know, and then number two would be we still are a great place to come and I don’t think that our migration trends are going to stay in the toilet forever and so that’s all about housing, which you and your audience will know very well. You know, we need to bring down the cost of housing. This time we saw population stall not because of like the ’80s when the mills closed and there were no jobs so people had to move out. This time, unemployment rates were very low. Most people who wanted a job could have one. And so, in this environment, it was pretty clear that affordability was a big driver given the pattern of migration both within the state and out of the state. And the fact that so many children moved out of our high-cost areas would really suggest that housing affordability was a massive issue in our population stall. What’s the cure to that? Obviously more housing supply.

Greg Frick: Right. Right. More supply. What’s your take on the, you know, especially in the city of Portland, Multnomah County on the, you know, the tax, you know, you hear, you know, we’ve got the highest tax rate at the, you know, at a lower, you know, compared to New York City. I mean, do you think that’s driving… I don’t know if it’s, you know, I know it’s driving some people out, but is, you think it’s, you know, contributing to the stall of maybe new businesses growth coming in and looking at this area? What’s your take on that?

Mark McMullen: Well, I think I think it is certainly a factor and I used to always, you know, this has always been a concern of Portland policymakers for years and years and years and Oregon more broadly that, you know, and particularly given the tax difference across the border in Washington, that, you know, we, you know, that our tax system is, you know, holding us down. Now, in the past, not so sure that was the biggest factor, but it was a factor. Particularly if you have a business that you’ve owned for 30 years and you’re going to get capital gains, a big bill, you know, it makes sense to move across the river. Now it’s where it’s a little bit more extreme and the anecdotes are really piling up in terms of people being pushed out by the tax structure. And you put on top of that, you know, the sort of national press we’re getting, which, you know, may be accurate, may not be accurate, but nevertheless…

Greg Frick: Yeah.

Mark McMullen: Yeah. We were always the darling. And now, you know, if you look across and there was a, of course, a real estate investor survey that just came out this week that put Oregon, not necessarily in housing, but in overall real estate investment, not that attractive. And I think a lot of that…

Greg Frick: We can only go one, you know, we can only go one way up. We can only go up from that report. So I told somebody in my office… [laughter]

Mark McMullen: That’s right.

Greg Frick: You can’t get much lower than 80. Yeah.

Mark McMullen: No, that’s right. That’s right. You can’t get much lower than 80 out of 81. But, and we won’t, you know, I’m an economist, so I’m going to talk about the invisible hand or whatnot, right? You know, when the prices are going to be attractive. I mean, not obviously right now to investors because they’ve dropped quite a bit. But that said, a lot of the land costs or costs of getting an existing building or the like are dropping. And so that should stimulate some economic activity and eventually turn into construction demand. If just a question about how long the invisible hand takes to lift us up.

Greg Frick: Right. Right. And I think it’s going to be interesting for as you kind of alluded to, policymakers and elected leaders. You’re in a different kind of game now. You were the darling and now you’re not. So you’ve got to change your strategy a little bit as opposed to, you know, how to attract and things like that. So it’s again, I’m with you. I think, you know, the living here and the weather and I think people and the immigration is going to change but, you know, is there some things that we can do to fuel that up to go faster, you know, to get more businesses as we’re competing now? You’ve got to compete with more, you know, regional areas and markets and so, you know, there’s more competition out there and we just can’t rest on our laurels and think, you know, people are going to come here just because how beautiful it is.

Mark McMullen: Yep. We certainly were spoiled and we still do have a little bit of that. You know, in terms of the immigration trends, you know, we’re still looking relatively strong with these, the gold standard of economic development where these young working age households, you know, a lot of those folks still want to come here, which is great, you know, in their young working years when they’re the most mobile and are setting their roots. And so, we’re still seeing a lot of that. So, I’m very, you know, optimistic about the future as we go forward. But at the same time, you know, we do have a black eye right now.

Greg Frick: Right. Right. Well, thank you. I want to thank you for taking the time to kind of share some insight on that. I’ve got your website here. I’ll put it up so people can see if they want to get more information. And I’d love to check back with you a little bit and see, you know, see what happens. I think the next year or two will be very interesting if the tides… it’s a slow, you know, it’s a big ship that’s hard to turn, but once you start turning, it’s just going to… I just don’t see this ramping right away back. But, you know, I’ve got like you, optimism that things are starting to change and we’ll see some positive direction.

Mark McMullen: That’s right. And, you know, we are facing these headwinds like I say from the macro economy that we really can’t affect. Interest rate, you know, measures and we don’t know when those, you know, any of the Fed action might trickle into longer term rates that are more important for the construction industry. There is one light on the horizon. And I was hoping we would talk about for the multifamily folks which is the condo development in Oregon.

Greg Frick: Mm-hm.

Mark McMullen: Where there was… there were some loosening of some of these construction defect liability laws over the last session, which were still an outlier. One of the high, you know, most extreme in terms of strictest liability protections, but nevertheless, those are moving now more in the range of some of the other Colorado, Washington states that are, you know, on the Nevada… on the, you know, higher end. And so more like everywhere else, which hopefully will stimulate some of this…

[00:21:14] because it really is, if we’re talking about an entry level, you know, we’re talking about almost 40% less than single family houses allow. A lot more homeowners to get a foot in and start to build equity, which is really here in Oregon, it’s really the main way of generating wealth. Not a lot of households own businesses or huge stock portfolios. You know, most of their wealth is in their home. And this really allows a more affordable entry point. And hopefully we’ll see that because after the housing crash, we saw, you know, condo development drop into the toilet along with every other state because largely due to the fact that rents were so high and so only made more sense as an apartment building.

Speaker 2: Yeah.

Speaker 1: To do an apartment building. That’s right. And in recent years that, you know, has changed somewhat. We’ve seen in other states, you know, a pickup in the condo development or home ownership and multifamily, but not yet in Oregon. And so hopefully if we can continue to push the envelope on those policies, we can get a little bit of traction in Oregon of multifamily space. We’ve only got about 6% of those are owner occupied. Across the country, it’s more than double that.

Speaker 2: Right. Well, Mark, I think they’re starting to get a recognition in Salem that they need to make some policy changes to spur some growth on this thing because again, it’s they don’t think it’s I think it’s a it’s just it’s an added cost. So, when the costs don’t make sense, it’s you know, you’ve got to it just takes longer to recover when we keep adding on layers and layers of added cost to bring in new development. So, well, thank you again, Mark, and we’ll be talking to you again and we’ll see you next time on Multifamily Market Watch. Thank you.

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