Major changes to housing requirements enacted a year ago are beginning to reshape development decisions in Jackson Hole.
Requiring commercial developers to build more housing is clamping down on commercial projects.
But new incentives to encourage residential construction are showing promise.
One year after the new rules increased how much housing commercial developers are required to build, the town of Jackson has only seen one new commercial project, town of Jackson Community Development Director Tyler Sinclair said.
“We haven’t seen much — little to no — nonresidential development under the new regulations,” Sinclair said.
Sinclair cautioned that it’s too early to draw conclusions, saying planning policies typically take three to five years to analyze. Plus, other factors could be at play.
“It’s too soon to tell,” he said.
Old regulations required developers of residential projects to do the heaviest lifting on providing housing by requiring them to restrict about 25% of units built to affordable units.
Town and county elected officials changed the rules in July 2018, drastically increasing costs for projects like offices or restaurants and lowering requirements for multifamily residential.
The new regulations seek to strike a balance between housing and job growth by requiring those who build in Teton County to provide housing for a portion of the employees their projects generate. How much housing needs to be built is determined by a formula that judges how many full-time workers are generated by a type of development, like retail or restaurant. Then the developer must build housing for a fraction of those workers.
“If there is development that generates demand, the housing supply to balance that demand is provided concurrently,” former Long-range Planner Alex Norton said at the time.
Developer warns of shutdown
Opponents of the new housing mitigation rules warned they would act as a moratorium on new commercial development.
“These rules will shut down development,” developer and restaurateur Joe Rice told officials in May 2018. “There’s no doubt about it. This will shut down development, which will mean you will get no housing.”
For example, under the previous rules a 10,000-square-foot office space would have been required to provide only 0.222 units of housing.
But under the new rules, because offices generate many year-round, full-time workers, the same office would have to pay to build 4.934 units in town or 4.306 units in the county — a significant cost increase.
In another example, the 77,887-square-foot hotel under construction at 112 Center St. was required to build 4,172 square feet of housing under the old regulations (though the developer is exceeding that, building 4,704 square feet in dorms and apartments).
If the hotel were built under the updated rules, the requirement would be for 23 units in a mix of one- two- and three-bedrooms, town Planning Director Paul Anthony said.
So far new commercial development has indeed slowed, with only one commercial project in the works in town limits.
Cowboy Coffee co-owner Rob Ottaway is going ahead with a plan to build a new retail operation on South Highway 89 near the Maverik gas station. The project is primarily a coffee drive-through with an office, but he is tacking on some self-storage containers to bring in extra income for the project. Self-storage was a good option because it is low-maintenance and doesn’t generate a significant number of employees, which would trigger housing requirements.
Better than ‘insane’ fee in lieu
But building the new coffee shop space will require housing for employees generated by the new business. The rules were designed to make it more attractive to build housing than pay a costly fee to the Jackson/Teton County Affordable Housing Department.
Ottaway said the fee in lieu of building housing for his project would have been “insane,” about $110,000. So instead, his team plans to build the required housing units. That way, members of the team get housing and a return on their investment rather than simply paying a fee. They’re even going above the requirements to take advantage of an economy of scale.
“From our standpoint the value of being able to house our employees — we were committed to doing that and wanted to do that,” Ottaway said.
The requirements also influenced the type of units he’s building. The mitigation requirements restrict rents, so the max he could charge for a two-bedroom would be $1,576, while studios could net $1,172 to help pay for the project. He went with a deed-restricted affordable studio to fulfill the mitigation requirement and is also building a free market two-bedroom and an extra studio that will also serve as employee housing.
Ottaway’s main problem with the mitigation requirements is that he found them “rigid.” He said it was frustrating that Cowboy Coffee is building more units than required but won’t get credit for that in the future, or can’t sell the credits to another developer.
“Not having a more nuanced process for the mitigation, I think, is an issue for the town and county,” he said.
The commercial projects residents have seen under construction around town this summer — like the Huff House Inn expansion, Elk Country Inn expansion and the new hotel at 112 Center St. — were permitted under the previous regulations, Sinclair said.
Tyler Davis, a local developer, said interest in building commercial is slowing in the wake of the new regulations. He said the requirements are “scary if you’re trying to add commercial of any type.”
“I don’t think it’s fair to stop commercial development altogether,” he said. “Obviously, it won’t stop it completely forever. But it will slow it, and it will make everything much harder to pencil out.”
He said he would prefer the free market allow for a mix of commercial and residential projects.
“There’s so many other lots and spaces I think commercial would be great for, and you’re not going to be able to make it happen,” Davis said.
Business owner Chris Dickey was among those who opposed the new regulations. He said the rules hamper the growth of his public relations company, Purple Orange, because mitigation rates make expanding office space cost-prohibitive.
“We have so many number of desks in our office, and from there we have nowhere to put people,” he said. “If we could put a second story on our building it would impact very few people.
“This rule is certainly affecting our growth, and I’m sure it’s affecting other people’s growth,” he said. “It’s a moratorium, in my opinion, to small-business growth. I just feel there should be some kind of exemption for a small business to be able to scale.”
Another consequence of the mitigation rates is that in driving up costs of developing new commercial, the cost of existing commercial buildings — which don’t require additional housing mitigation — also has gone up, Davis said.
“It’s going to drive up values of the already existing commercial space because it’s already been mitigated,” he said.
Realtor Ed Liebzeit said he hasn’t seen too many commercial transactions in the past year, but “the logic is, if the cost of building goes up itself, plus the mitigation, it’s going to make the resale of properties more attractive.
“As these properties change hands at higher prices it’s going to have an impact on rent and make it harder for our businesses, particularly around the Town Square, to make their numbers work to make it a viable business,” Liebzeit said.
While the requirements set up costlier barriers for commercial, the burden on building residential was reduced.
Sinclair said people are more interested in building residential projects than they were before, a desired effect of the new regulations.
“We’ve actually had far more residential units under permit or approved over the last year, probably more than we have at any point in the past 10-15 years,” he said.
Sinclair said the increase in nonresidential rates is having a significant impact on the decisions developers make on what to build on mixed-use land — in favor of housing.
“With the increase in the nonresidential rates, it’s impacting decisions of what people will do on their property much more than it had in the past,” Sinclair said.
The mitigation requirements were also approved at the same time as an update to town zoning that increased density in certain areas. It allowed developers access to bonus density if 1 square foot of bonus space is constructed as workforce housing for every 2 square feet of market-rate space.
For Davis the town’s rezone has been a “huge, huge help to add more units.”
Between two housing projects at Teton Gables and on South Park Loop, Davis said “we’re looking at an extra 45 units just because of the density and the 2:1 bonus. Those have been a great help.”
“It helps the developer make more money, develop more units, and it adds more supply to the town’s units,” he said.
Sinclair agreed the new zoning is performing well.
“I think it’s taking time for developers and property owners to understand the benefits they were afforded under the new zoning, but I think that it’s starting to spread,” he said.
GYDE Architect John Stennis said the rules change the game, for example, by providing incentive for people to build retail (lower mitigation rate) rather than restaurant or office space (higher mitigation rates).
It also incentivizes high-end housing, since residential mitigation rates are so low.
”If you’re looking at building a new mixed-use building, you’re really trying to capitalize on every square foot of market-rate real estate that you can,” Stennis said. “There’s such a huge profit margin in selling that product, whether it’s a rental or an ownership piece.
“It’s highly profitable, and with the land being expensive and even the cost of even relatively simple buildings being expensive, you’re looking for ways to make a building pay for itself, and one way is pushing a luxury residential component.”
That luxury residential may take advantage of the 2:1 bonus to build some workforce housing, too.
Sinclair cited the “Hole in the ground” property on Glenwood and Gill, which is under redevelopment by Wisconsin-based Bear Development.
That 29-unit townhouse project is taking advantage of the 2:1 bonus, allowing for construction of five units restricted for the workforce.
“On a project like that, it has affected the product type, getting some residential in there and lowering the mitigation as a result,” Sinclair said.
Stennis agreed with Sinclair that it’s still too early to evaluate the impacts of last year’s new housing mitigation regulations.
“Development projects take a really long time to get steam under them,” Stennis said. “Design on a project can take a year or more. I think the reality is it’s probably still a little unknown how they’re going to really affect development.”