Norwalk's Redevelopment Agency was evaluating potential changes to the community’s inclusionary zoning policy as a way of increasing the production of diverse housing.  As part of its due diligence, the Agency engaged RKG Associates to report on the potential community and market impacts of changing the affordability requirement from 10% to 20% of all newly constructed units within the rapidly growing South Norwalk ("SoNo") transit-oriented development area.

 

RKG created a prototype development financial model that estimates the returns on investment for a “typical” Norwalk housing or mixed-use project, and compares them with the same project developed under the proposed policy.  The model includes a series of variable inputs for market performance (i.e. rent levels), policy requirements (i.e. percent below-market housing), and development data (i.e. construction costs).  These variables enabled RKG to perform a series of sensitivity analyses to understand the impact of numerous influences on development feasibility.  Data for the model was assembled from local sources including RKG Associates’ market research and from anecdotal information provided in interviews with developers and other housing experts in Norwalk.

 

Under the existing 10% affordability requirement, further multifamily residential development in the South Norwalk TOD area appeared to be feasible and profitable given current market conditions. However, given RKG’s best estimates of dozens of key variables, developer returns and profit margins are on the low end of most investors’ preferred range, where any volatility or additional risk can make a project financially unattractive. Managing and reducing costs, as well as achieving forecasted rents, are especially paramount to a successful development project in this market and economic climate.  The change to 20% would most likely have caused a disruption in housing development, as return levels would fall to levels deemed unattractive by many investors. Subsidies or tax incentives would likely then be necessary to offset the impacts and make development an attractive proposition once more.