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…. AIA?

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 seems to be 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.

You might be asking yourself: Why give away months of rent for free instead of 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 spook investors. 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. 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. Such investment is in high demand the closer you 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. That’s why nobody does it.

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

This, of course, creates a nearly insurmountable design challenge of making something just good enough to stay solvent, and just bad enough to stay affordable. Few will bother to do this on purpose.

Build-to-own

A great way to precisely match residents’ finances to their housing is build-to-own. This is perhaps the only model in which there is no incentive to inflate perceived value. The only thing in the way is the challenge of keeping the construction cost down in the current luxury frenzy. I’m fully aware that architects are among the beneficiaries of this model, and I’m an architect myself. However, I’m in the commercial sector and have no plans to switch to residential (designing a house for my parents was enough for me). There is no conflict of interest here. My conflict of interest is below.

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 profit-driven 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 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 that can fulfill the role the government vacated.

Religion

No, I’m not suggesting to pray affordable housing into existence. I want to point out that religion is incentivized to be a provider of 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, limiting their reach and impact. Nonetheless, I’d be remiss not to call out non-profits for building actual projects despite overbearing constraints.

Other non-profits take a cautious consulting approach, despite having much more expertise in building the projects. I’m talking about the AIA. Over the years, architects have advocated for affordable housing and created many schemes, but haven’t directly built them.

It is time to change it.

Bedrock Initiative

Disclosure

Political standing. In the US political framework, my bias would be generally left-leaning. That said, I reject certain dogmas on both Republican and Democratic sides, and I would likely be kicked out of their respective conventions.
Knowledge limitations. I have limited knowledge of financial tools and instruments. I invite feedback, suggestions, and criticism. I recognize that I need to learn a lot.

Proposal Outline

Incentives. Construction Professionals should get into affordable housing, either directly or through a subsidiary (non-profit, corporation, private equity), by designing, building, and holding affordable housing. An extensive enough portfolio will serve as:

Retirement portfolio/ professions social security. The actual Social Security is likely to be torn to pieces in the coming years. A way to prepare for that is to create a financial instrument directly linked to our professional reputation and expertise. As long as both are high, the returns should be steady.
Housing market stabilizers. Making rent across the economy more affordable and elevating the very definition of affordable housing.
Recession Insurance. Architectural work dries up during the recession while affordable housing enters peak demand. Designing our own affordable housing becomes our way to smooth the recession impact.
Political Capital. A multi-billion-dollar property portfolio will give a substantial weight to our advocacy efforts, such as sustainability. In the current political climate, this is, sadly, a requirement.
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). 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 somebody else.

Improving professional standing. Architects have a rather poor reputation among the consultants: troublemaking, stand-offish. We should bring on board engineers, contractors, and other consultants as equal participants. Their expertise is key and will supersede our aesthetic sophistication on this occasion. This will hopefully improve our standing with consultants.
Improving AIA finances. It was hard to justify the AIA membership fees later. While I understand why they are so high, I think they should be lowered by creating additional revenue streams.
Higher influence over fees. Having our own gig to fall back on would allow us to set higher fees. Building and managing our own portofilo will act as a baseline, which will give us confidence to walk away from toxic projects and negotiate fairer fees in others.

Financing

Funding source. Construction professionals (retirement funds, private investments), grants if available, and bank loans. No outsiders beyond that. Architects alone hold around 50 billion dollars in retirement nationwide. Also, if the whole construction industry comes for a loan, it could negotiate very favorable terms from the banks and generous grants from the government.
Optional Participation. Participation of members is optional; no one will be forced to join. We draw participants in by offering a safe haven from the market volatility. The primary goal will always be generating returns (growing retirement portfolio). Creating affordable housing is a byproduct.
Decentralized Structure. Highly decentralized. A zoo of LLCs will be created, one for each building, to limit liability. Those will be grouped by chapter (State, municipality), then all together assembled into a national portfolio. Since only construction pros can hold a share (AIA, consultants, contractors), it will guarantee that we only serve our interests and no one else's. The rules will be set internally.
Resiliency. Across all states, portfolios should be resilient enough to generate steady returns and not only be immune to economic downturn, but thrive in them.
Competition and risks. We will avoid direct competition with developers by staying in the affordable lane while leaving the luxury segment to them. There is currently a housing shortage of 3-7 million units, so we can assume a significant market share. There is no safer and more lucrative investment than a business you control, especially when your knowledge and expertise directly align with it.
Private equity. Perhaps a private equity structure is the best fit. We will know the LLCs it owns very intimately, since we are building and managing them. We don't share financials with anyone except the participants, per private equity structure. No outsiders means no outside speculation on our assets.

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 will be a priority. We wouldn’t want the roofs of our retirement portfolio to leak.
Strong Design. Our design expertise is the foundation of our retirement portfolio.
Strong Incentive Structure. We want to retire one day and feel more confident during recessions.
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 our profession.
Defendable. We have a direct incentive to defend our assets from destruction or tampering by outside forces.

Political Reason

Downturn resilience. Rampant deregulation makes a new 2008 inevitable. Keeping all assets in the public stock portfolios got too dangerous.
Climate Change. When we advocate against climate change, we will now have the backing of the entire construction industry and billions of dollars in assets. This could finally make climate change initiatives non-negotiable for the market and the government. Either listen, or get driven out of the market with a superior product.
From activism to acting. I respect activism and raising awareness, but at this point, the government is well-aware and actively doesn't care. In this situation, the only path forward is action.
Aggressive lobbying. There are explicit boundaries to affordable housing we will be running into. Our job is to break them. The larger our portfolio, the easier it would be to lobby, as large players have louder voices. We must apply ongoing systemic pressure on all levels. Don't give up, no matter the political climate. Any political climate can be exploited for your benefit.

Precedent

Affordable housing in Duluth. The one that has a ton of awards. Architects putting their skin on the line is nothing new. Winner of a 2022 AIA Minnesota/McKnight Foundation Affordable Housing Design Award. Benjamin Olsen and Ryan Hughes, Office Hughes Olsen. Josh MacInnes with 1LLC.
Ken Sheehan. Bounce this idea off him.
Jacob Zickmund. He believes that architects should be developers and has some experience in it.
Affordable housing players. Try to get info from the largest companies involved in affordable housing. The top dog has about 50,000 units. What did it take to build up the portfolio, how did they start? What do they think about professional organizations creating a business similar to theirs? Are they interested in collaboration and exchange of ideas?

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