Affordable: Incentive Framework + Bedrock Initiative

Intro

Affordable housing is first an incentive problem. A good, affordable design existing in a bad incentive framework will fail to be affordable. In other words, unless there is a direct incentive to keep the housing affordable, it will become unaffordable as it generates more profit.

Before we make any design proposals, we must answer the following question:

Who has the incentives for building affordable housing, and what are they?

Market players, government, religion…. us?

Economic Incentives

Build-to-invest

Lately, Profit Machine is treating housing as an investment asset, disregarding residents’ feelings about it. Housing is packaged into investment portfolios, and shares are sold to investors. Since it is highly lucrative, it is unlikely to change in the future.

In this climate, there is a strong incentive to tag your property as luxury, deserving or not, and inflate its value; everyone is doing it. However, this makes the luxury housing market crowded, which in turn makes luxury housing riskier.

Luxury units for sale will sit on the market for years, competing for a very limited number of people with deep pockets. For the same reason, luxury rentals will offer one, two, and even three months of free rent.

Fun Fact. There is an incentive to give away months of rent for free over lowering the rent. Since commercial residential is an investment asset, there is a funky way of determining its value. The value stems from the number of units and their monthly rent. Lowering the rent will lower the property value, which in turn will displease Profit Machine. The fact that the property is giving away free months of rent and is less profitable is less important than the overall value of the property. The jig will be up once such luxury properties go in the red and lose a big chunk of their value in bankruptcy, but that’s a tomorrow us problem.

The luxury market is the first to be hit during a recession. With less expendable income, even true luxury properties struggle to attract clients.

Luxury is a higher-risk, higher-reward property that suffers in a recession.

What does affordable housing offer? At first glance, it seems like affordable housing is riskier since the residents are at a higher risk of insolvency or squatting. However, this higher risk is well compensated for by a huge demand for affordable housing: there are a lot more broke people than rich people. The property will be permanently full. In a recession, there will even be a long waiting list. While luxury developments are giving away free months of rent, the affordable ones will be in a position to increase prices.

Affordable is a lower-risk, lower-reward property that flourishes during a recession.

Affordable housing could be a great lower-risk investment property, especially for professions most affected by recessions (and architects are). Such investments are also in high demand for everyone the closer they are to retirement.

Build-to-sell

Even if you built affordable housing, you will get a strong itch to sell it as luxury and pocket the difference. Even if you overcome this itch out of moral constraints and sell the property as affordable, the next owner will immediately flip it as luxury, pocketing the profits that could have been yours. This is one of the fundamental laws of Profit Machine: if there is profit to be made, it will be made by you or by someone behind you.

If the property can be sold as luxury, it will be sold as luxury.

This leaves us with a nearly impossible design challenge of making something just good enough to stay solvent and just bad enough to stay affordable. Few build-to-sell players will bother to engage in this design yoga.

Build-to-own

Build-to-own is a great way to precisely match residents’ finances to their housing. This is perhaps the only model in which there is no incentive to inflate perceived value during construction. There is still the eternal challenge of keeping the construction cost down, but that’s manageable. This model took a hit in the 2008 housing crash, which made many residential architects exit the profession and never return, leaving the market wide open for the build-to-sell players. Perhaps, architects should stage a comeback for the build-to-own model and find a way not to get obliterated in a recession again.

Fighting the informal vs embracing and learning from it.

Other Incentives

Government

I’ve already mentioned that the government had incentives to build affordable housing at a loss to boost gains in other sectors. This incentive structure has been disrupted ever since Profit Machine ate the government. With such a powerful entity digesting, I don’t see this scheme coming back, as there are now powerful short-term-profit roadblocks in place to prevent this from happening.

We have two options left. One option is to make Profit Machine burp the half-digested government back, but I’ll leave it to the US citizens to try it if they are willing. Another option is to find a different entity that will be more resistant to Profit Machine and can fulfill the role the government vacated.

Religion

No, I’m not suggesting that we pray affordable housing into existence. I want to point out that religion is incentivized to provide affordable housing.

The influence of religion in the US has been in decline in the past century: 27% of the US population is now unaffiliated, up from 2% in the 1940s. Despite the setback, religion remains a powerful entity with a presence in communities of all sizes. Also, religion enjoys tax-exempt status and strong constitutional protections.

In the cynical eyes of Profit Machine, religion is built on its Message and people willing to hear it, spread it, and support it monetarily. The Message of Christianity, the US dominant religion (69% share, 4% share is all others), historically lands very well among those struggling financially, with attendance rising during a recession. Therefore, religion has an incentive to create affordable housing close to places of worship and keep it affordable. This will guarantee more coming to service who will hear the message, spread it, and, when their fortunes improve, donate.

I don’t think that Religion should be the only provider of affordable housing: what about those unaffiliated? However, Religion could make a sizable dent in the problem. Perhaps, they could even inspire other market players to build affordable housing, to save their souls, or as a PR stunt.

Non-Profits

Non-profits are built on good intentions, which is a problem in a system where good intentions lose to good incentives. Predictably, Profit Machine learned to use non-profits as a tool to avoid taxes or score PR points. It’s not the Machine’s favorite tool to do that, so nonprofits have highly irregular and limited revenue streams, undercutting their reach and impact. Nonetheless, I’d be remiss not to call out non-profits for building actual projects despite overbearing constraints.

Strata

Are there strata of society that are interested in affordable housing? The obvious strata are low-income individuals, except that by definition, they can’t afford to develop housing for themselves. The other strata are us, architects. Below, I will outline why architects are uniquely positioned to develop affordable housing and why they have a strong incentive structure to do so.

STRATA MIDDLE HOUSING

REWRITE AS A CALL FOR ARCHITECTS (AND CONSULTANTS?) TO BE DEVELOPERS OF MISSING MIDDLE HOUSING. WE CAN PUT DOWN OUR EXPERTISE AS COLLATERAL (BY SHOWING UP WITH A DRAWING), AND OUR EXPERTISE COUNTS FOR SOMETHING WHEN TAKING OUT A LOAN. CUT ALL SEMBLANCE OF ORGANIZED EFFORT AND PRIVATE EQUITY. YOU HAVE NO IDEA WHAT YOU ARE TALKING ABOUT ANYWAY.

Architects can cluster, collaborate, and pool funds to buy a plot of land, then each develop their share. Lean into the architect’s fundamental desire - design.

Disclosure

Political standing. In the US political framework, my bias would be generally left-leaning.
Knowledge limitations. I have only conceptual knowledge of financial tools and instruments. I invite feedback, suggestions, and criticism from those familiar with the details. I recognize that I need to learn a lot.

Proposal Outline

The proposal calls for architects to become developers of missing-middle housing.

Construction professionals (architects, engineers, contractors, etc.) will enter the affordable housing market as owners. They will design, build, and hold affordable housing as a members-only social security or retirement fund. They will effectively take over the government's relinquished function and act as a housing market stabilizer—a housing market bedrock.

Funding source. Funding sources may include retirement funds, grants if available, bank loans, and private investments. Architects alone hold around 50 billion dollars in retirement funds nationwide, although I do not think it is responsible to sink all of it into this initiative.
Decentralized Structure. The structure is highly decentralized. To limit liability and increase the degree of involvement, we will have a separate LLC for each building, locally built, operated, and maintained. Those will be grouped by chapter (state, municipality) and then assembled into a national portfolio under a private equity entity. Private equities are routinely blamed for one social disaster after another, which is a testament to their success and effectiveness. We should tame one.
Members only. Only construction professionals can hold a share (Private equity is exclusive by its nature), guaranteeing that we serve our interests and no one else's. The members-only structure will limit the funding, but it is well worth it to limit the risk and have the freedom to choose our course.

Optional Participation. Members' participation is optional; no one will be forced to join through an AIA decree or otherwise. We draw participants only by having a lucrative offer. The incentive of growing retirement in a lower-risk environment will always come first. Solving a crisis of affordable housing is a byproduct that is nevertheless directly linked to the initiative’s success (similar to the Japan Railway Group scheme).
Risk Management. Affordable housing is always in high demand, peaking in recessions. A decentralized structure will distribute the risk nationwide (a decline in one region will be offset by a development boom in another). We will avoid direct competition with developers by staying in the affordable lane while leaving the luxury and fauxury segment to them. Our only competition is the other for-profit affordable housing companies, but this market is not crowded. The lack of friction leaves the door open to share expertise and even collaborate. Finally, there is no safer bet than a business you directly control, and a decentralized structure with locally controlled LLCs allows direct involvement of the plan participants in the portfolio building and maintenance. Instead of betting our retirement on the nebulous index fund, we bet on our own professional expertise.

Incentives Structure

Retirement portfolio/ professions social security. Social Security is likely to be sacked and plundered in the coming years. One way to prepare for that is to create a financial instrument directly linked to our professional reputation and expertise.
Recession Insurance. Construction work dries up during the recession while affordable housing enters peak demand. Creating affordable housing for ourselves becomes our way of smoothing the recession's impact on our professions.
Political Capital. Advocacy and expertise not backed by financial prowess will fall on deaf ears in the present political climate. A multi-billion-dollar property portfolio will give substantial weight to our advocacy efforts, such as sustainability, historical preservation, and others, perhaps even making them non-negotiable for the rest of the market. It will also allow our lobbying efforts to be more aggressive and effective. 2025 is the era of deregulation, and we can use it: if there are obstacles to affordable housing, we can apply pressure and remove them. Activism has far less effect than action.
Improving community standing. Holding affordable housing will align us with the public. We've been consistently out of sync with the public for a while (arguably forever). They justifiably view us as more aligned with Profit Machine than with them. Acting as a housing market stabilizer would ensure our good standing with the community. This would also help to fulfill our ethics obligations directly, something that gets lost in delivering projects for Profit Machine.
Improving professional relations. Building for the Bedrock Initiative means we are the client, and we all have a direct financial interest in the project's success. This will forge strong professional bonds among the disciplines and perhaps finally bring the dream of IPD to life. Having a stake in a common retirement fund will give us an incentive to maintain this bond.
Higher influence over fees. Having our own gig to fall back on during hard times would allow us to set higher fees. Building and managing our own portfolio will act as a baseline, which will give us confidence to walk away from toxic projects and negotiate higher fees in others.

Core Principles

Let's see how the proposal responds to the core principles of affordable housing outlined in the first chapter.

Long-term outlook. All retirement portfolios have it. High reliability and low maintenance cost of the buildings will be a priority. We wouldn’t want the roofs of our retirement portfolio to leak.
Strong Design. Our design, engineering, and construction expertise is the foundation of our retirement portfolio.
Strong Incentive Structure. Outlined above. We want to retire one day, feel more confident during recessions, have heftier political weight, and generally make more money.
Equity over Equality. The success of our retirement portfolio depends on the success of the affordable housing we create. We can’t afford to put the residents in positions of failure.
Ongoing Innovation. Innovation is the foundation of all our professions, and it is guaranteed by the initiative's decentralized structure. There are no nationwide scripts, only local, tailored solutions.
Defendable. We have a direct incentive to defend our assets from destruction or tampering by outside forces. We have no incentive to sell assets so they can be flipped into luxury by someone else, and we have no incentive to flip them into luxury ourselves, as it means entering a far more crowded, aggressive, and risky market. This would put us back at risk in a recession, alienate us in the eyes of the community, and undermine our political standing, all of which would impact our finances by making the Bedrock initiative insolvent.

Precedent

Affordable housing in Duluth. Architects putting their skin on the line is nothing new. Below is the winner of a 2022 AIA Minnesota/McKnight Foundation Affordable Housing Design Award. It was developed by Benjamin Olsen and Ryan Huges, Office Hughes Olsen. Josh MacInnes with 1LLC.
Do you know other examples? Feel free to reach out to me and share!

Conclusion

Creating an incentive structure for affordable housing is not easy, but it is necessary to succeed in the omnipresent Profit Machine. Good intentions always erode under the pressure of incentives, so perhaps it is time to put incentives first, but do it in such a way that good intentions become their inevitable outcome.

If we succeed, we can continue doing what we love, designing great, enduring buildings, while knowing we contribute to the solution, not the problem.

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