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Modeling Inclusionary Zoning Impact on Housing Production in Los Angeles: Tradeoffs and Policy Implications
Introduction
Inclusionary zoning has emerged as a prominent policy tool in California's ongoing struggle to address its severe housing affordability crisis.
As cities face mounting pressure to produce more below-market-rate housing units, policymakers increasingly turn to inclusionary zoning requirements that mandate or incentivise developers to include affordable units within market-rate projects.
However, the relationship between inclusionary zoning policies and overall housing production remains complex and contested. Shane Phillips' 2024 research report, "Modeling Inclusionary Zoning's Impact on Housing Production in Los Angeles:
Tradeoffs and Policy Implications," provides critical insights into these dynamics through sophisticated modeling of Los Angeles' Transit Oriented Communities program using the Terner Housing Policy Simulator.
Understanding Inclusionary Zoning's Complex Tradeoffs in Los Angeles Housing Production
Los Angeles faces one of America's most severe inclusionary zoning housing crises, with the city targeting 456,000 new homes between 2021 and 2029—including 185,000 units designated for low- and very low-income households. Against this ambitious backdrop, inclusionary zoning (IZ) has emerged as a frequently proposed policy tool to expand affordable housing supply without direct public expenditure.
Inclusionary zoning policies require or incentivise developers to include a percentage of below-market-rate (BMR) units within market-rate housing projects. Yet as Shane Phillips' rigorous 2024 analysis demonstrates, the relationship between inclusionary zoning requirements and overall housing production involves profound tradeoffs that demand careful calibration by policymakers.
Using the Terner Housing Policy Simulator—a sophisticated modeling tool developed specifically for Los Angeles—Phillips examined how varying inclusionary zoning requirements would impact both market-rate and extremely low-income (ELI) housing production over a ten-year horizon.
The analysis centred on Los Angeles' Transit Oriented Communities (TOC) program, widely regarded as a model inclusionary zoning framework because it combines mandatory affordability set-asides with substantial development incentives like density bonuses, reduced parking requirements, and streamlined approvals for projects within a half-mile radius of major transit stops.
The Production Tradeoff: Diminishing Returns and Accelerating Losses
The simulator's outputs reveal a critical nonlinear relationship between inclusionary zoning mandates and housing outcomes. As inclusionary zoning requirements increase from 0 to 40 percent ELI units, market-rate housing production declines precipitously while BMR production follows an inverted U-curve—rising initially but eventually declining as projects become financially infeasible even with TOC incentives.
Eliminating the inclusionary zoning requirement entirely while maintaining TOC development bonuses would yield approximately 398,800 total housing units over ten years—a 38 percent increase compared to the current 11 percent inclusionary zoning policy baseline. Notably, even this optimistic scenario falls short of Los Angeles' 456,000-unit Housing Element target, underscoring that no single policy instrument can resolve the region's housing shortage.
The most dramatic production losses occur at lower inclusionary zoning thresholds. Increasing requirements from 0 to just 1 percent triggers a steep drop of approximately 71,400 market-rate units. Between 1 and 16 percent inclusionary zoning, each additional percentage point reduces market-rate production by 4,600 to 11,900 units.
By 17 percent inclusionary zoning, market-rate output is cut nearly in half (49 percent reduction), and at 25 percent inclusionary zoning, total housing production declines by 50 percent. Beyond 25 percent, both market-rate and BMR production begin falling simultaneously as development feasibility thresholds are breached—demonstrating that higher mandates don't automatically translate to more affordable housing.
The Exchange Rate: Quantifying the True Cost of Inclusionary Zoning Units
Perhaps the study's most illuminating finding involves the "exchange rate" between market-rate and ELI units—the number of market-rate homes sacrificed to produce each additional affordable unit. At 11 percent inclusionary zoning (Los Angeles' current requirement under TOC Tier 3), the model shows 4.5 market-rate units are lost for every ELI unit gained. This ratio worsens substantially at higher mandates: 25 percent inclusionary zoning yields an exchange rate of 5.1, while 40 percent inclusionary zoning reaches 8.9 market-rate units lost per ELI unit produced.
Interestingly, 16 percent inclusionary zoning represents an inflection point—it generates the most favorable exchange rate (4.3 market-rate units per ELI unit) while still producing substantial BMR output (41,700 ELI units over ten years). Yet even this "optimal" scenario entails significant costs: nearly 180,200 fewer market-rate units compared to a no-inclusionary zoning baseline. The analysis starkly illustrates that inclusionary zoning doesn't create housing from nothing—it reallocates production capacity from market-rate to subsidized units, often with net reductions in total housing supply.
The Private Subsidy Paradox: Hidden Costs of "Free" Affordable Housing
Proponents often champion inclusionary zoning as a mechanism to generate affordable housing without public expenditure. Phillips' analysis quantifies this private subsidy by calculating the difference between forgone market-rate rents and actual ELI rents over a ten-year period.
At 16 percent inclusionary zoning, developers would provide an estimated $1.41 billion in annual private subsidies by year ten—representing substantial value for extremely low-income households who secure these units.
However, this apparent benefit carries hidden costs. First, developers likely pass some subsidy costs to market-rate tenants within inclusionary zoning projects through higher rents or reduced amenities ("value engineering"). More significantly, reduced overall housing production tightens supply in the broader rental market, potentially elevating rents for the vast majority of Los Angeles renters who live outside subsidized units.
Crucially, Phillips calculates that remarkably small rent increases would entirely negate inclusionary zoning's private subsidy benefits: just 0.8 percent faster annual rent growth under the 16 percent inclusionary zoning scenario would offset the entire $1.41 billion annual subsidy value. Given that Los Angeles already experiences persistent rent pressure, such marginal increases appear entirely plausible when 180,000+ market-rate units vanish from the pipeline.
This finding exposes inclusionary zoning's fundamental tension: it improves affordability for a small cohort of extremely low-income households while potentially worsening affordability for the broader renter population—including many moderate- and low-income households who don't qualify for ELI units but still struggle with housing costs.
Why TOC's Design Matters: Voluntary Participation and Development Incentives
Phillips emphasizes that Los Angeles' TOC program incorporates two features that mitigate inclusionary zoning's typical drawbacks: voluntary participation and robust development incentives. Unlike mandatory inclusionary zoning policies without bonuses—which risk stalling development entirely—TOC allows developers to choose between building under standard zoning (with no affordability requirements) or accepting TOC incentives in exchange for including BMR units.
This voluntary structure creates an important safety valve. If market conditions shift or incentive-requirement ratios become miscalibrated, developers can still build market-rate housing without TOC bonuses, preserving baseline production levels.
Meanwhile, TOC's density bonuses enable projects that might yield 100 market-rate units under base zoning to deliver 180 total units—including 20 ELI units—when utilizing incentives. This expansion of total unit capacity helps offset the financial burden of affordability mandates.
Nevertheless, the analysis cautions against assuming that larger bonuses automatically enable higher inclusionary zoning requirements. Construction costs don't scale linearly with building size; projects exceeding seven to eight stories typically require expensive concrete or steel framing (Type I construction) rather than wood framing, increasing costs by 30–43 per cent per square foot. These nonlinear cost jumps create feasibility cliffs that density bonuses alone cannot overcome.
Policy Implications: Reimagining the Affordable Housing Toolkit
Phillips' research carries profound implications for Los Angeles housing policy. First, it counsels extreme caution against increasing inclusionary zoning requirements to meet ambitious BMR production targets. While raising mandates from 11 to 25 percent would add approximately 17,700 ELI units over ten years, it would simultaneously eliminate 108,700 market-rate units—a net loss of nearly 91,000 homes.
Given that only 12 percent of Los Angeles-Long Beach area rental units receive any form of subsidy or income restriction, policies that constrict the unsubsidized market risk harming far more households than they help.
Second, the analysis suggests reserving different policy tools for distinct objectives. Land use reforms—particularly citywide upzoning to permit low- and mid-rise multifamily housing in neighborhoods currently restricted to single-family homes—should prioritize expanding overall housing production capacity.
Currently, only 28 percent of residentially zoned land in Los Angeles permits multifamily development. Expanding this footprint would lower per-unit land and construction costs, accelerate production across income levels, and moderate regional rent growth.
Conversely, producing deeply affordable housing for extremely low-income households likely requires direct public subsidies through mechanisms like the Low-Income Housing Tax Credit (LIHTC) or expanded Housing Choice Voucher programs.
These tools socialize costs across the tax base rather than concentrating them on new development—a more equitable and economically efficient approach. Crucially, expanding overall housing supply through land use reform would simultaneously reduce costs for subsidized housing developers and voucher recipients, creating synergistic affordability benefits.
Conclusion: Balancing Idealism with Economic Realities
Phillips' modeling exercise doesn't condemn inclusionary zoning outright—Los Angeles' incentive-based TOC program has demonstrably expanded BMR production with relatively modest impacts on overall housing output compared to mandatory inclusionary zoning regimes elsewhere.
Rather, the research serves as a cautionary tale against policy overreach. Inclusionary zoning operates within hard economic constraints: beyond certain thresholds, higher mandates reduce both market-rate and affordable housing production while potentially elevating rents across the broader market.
The path forward requires policymakers to acknowledge housing production as a unified ecosystem rather than compartmentalizing "affordable" and "market-rate" development. Every market-rate unit built expands housing choice, relieves pressure on existing stock, and creates fiscal capacity to fund direct affordability interventions.
Conversely, policies that suppress market-rate production—even with noble intentions—risk worsening affordability for the majority of renters while delivering limited gains for targeted populations.
Los Angeles' housing crisis demands multipronged solutions: strategic land use reforms to unlock development capacity citywide, preservation of successful incentive-based programs like TOC at calibrated levels, and significantly expanded public investment in deeply affordable housing.
Relying excessively on inclusionary zoning to meet BMR targets risks sacrificing the forest for a few trees—producing modest gains in subsidised units while undermining the broader housing production necessary to improve affordability for all Angelenos. The data suggests that when it comes to housing policy, sometimes the most inclusionary approach is simply building more homes.
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