Housing Development Is Conditional on an Accommodating Real Estate Market

Housing permitting has declined across the United States since 2022, even though the nation needs more homes to meet demand. To help ramp up housing supply, many states and localities are promoting transit-oriented development (TOD), the concentration of construction in neighborhoods adjacent to public transportation. But successful TOD depends on a real estate market in which projects “pencil out,” meaning they are financially feasible. Understanding what is needed to make TOD projects pencil out should be a vital element of a broader effort to promote TOD, which includes developing appropriate planning standards and tracking the performance of TOD.

Key Takeaways: Transit-Oriented Development Is Infeasible in Many Circumstances

Development projects depend on adequate revenues—such as the rents developers can charge for newly completed housing—to recoup land costs, pay for construction costs, account for risk, and make a financial return that is competitive with other sorts of investment. Revenues differ substantially between communities. Even though construction costs are relatively stable across markets, returns are generally higher in high-rent locations. As such, assuming land-use regulations allow for TOD, projects are likely to concentrate in communities with high housing costs.

Since 2020, construction costs have increased dramatically. At the same time, costs of debt have increased. These circumstances have made fewer projects feasible, which helps explain reduced permitting levels. Our stylized analysis illuminates challenges facing TOD, including inadequate market rents in some areas and high construction costs, issues that may be aggravated by affordability requirements.

We find that certain financial tools, such as local property tax exemptions for new projects, can help provide incentives for the construction of additional TOD. These can be associated with affordable housing requirements, but these must be implemented carefully to avoid unduly negatively affecting projects by forcing them to cover the added expense of subsidizing the rents of households with low incomes. Other tools, such as relief from local impact fees, can be helpful, but these can make it more difficult for cities and towns to pay for infrastructure needed to support TOD, such as streetscaping.

To address these issues, we recommend the following mechanisms for states to encourage TOD:

• Fill the gap needed to fund TOD-related infrastructure through grants to municipalities.
• Right-size requirements to respond to market conditions, including by implementing higher-density zoning standards in high-rent areas, reducing affordable housing requirements in low-rent communities, and adjusting rules based on the strength of the overall economy.
• Provide funding for affordable housing investments, such as through assistance for projects affordable for very low-income families, as well as through grants for land purchasing.

How We Conducted This Research

We used a multifamily real estate development model—called a pro forma—to test how revenue and cost scenarios influence the feasibility of TOD projects on several sites across Washington state. We also interviewed developers and other stakeholders to understand contributors to their development costs.