June 27, 2018

More linkage fees are not the solution for Boulder

Once again Boulder’s City Council has found itself in the spotlight with the dubious decision to increase the affordable housing linkage fee. While the conceptual idea of trying to stimulate affordable housing is understandable, it still is unclear if raising the linkage fee is the solution to a problem that has been facing Boulder for decades. In addition, while most likely not fulfilling the need for affordable housing, the negative ramifications of the fee are real and, potentially, could create additional problems for the city, especially when talking about affordable office space or office development in general.

First, to understand linkage fees, we need to back up with some history to set the table and demonstrate why linkage fees will impact office space in Boulder. Linkage fees have been imposed in Boulder for over 20 years. The original purpose was for residential development to either build affordable units as a part of the project, build affordable units on another site, or simply opt out and pay a fee to the city’s affordable housing fund. Over time, the City Council decided the jobs/housing imbalance was too significant and imposed a linkage fee on commercial development. What was once a fee below $10 per square foot that commercial developers had to absorb (and obviously pass on to tenants) is now heading toward $30 per sf on a sliding scale over the next three years. A $30-per-sf fee – highest in the country behind Palo Alto, California – most certainly will put a halt on new construction.

On the surface, it is easy to agree with City Council and commend them for trying to address the needs of many people who work in Boulder but can’t afford to live here. However, the cascade effect of what really could transpire with the $30-per-sf fee looks something like this:

Developer of new office project passes on to tenants the $30-per-sf linkage fee and very few tenants will be able for afford the high lease rates required from the developer.
Higher lease rates push the market, so all lease rates eventually will increase, making it very difficult for the fabric of our community, startups and nonprofits, to keep an office in Boulder.
The linkage fee makes building new projects nearly cost prohibitive. In turn, there is no development, which means no linkage fees, which equals no funds to assist in building affordable housing.

There seems to be better ways to accomplish our housing dilemma then simply putting it on the businesses, which already contribute to the community in myriad ways. Linkage fees are not the solution.

Despite this latest move by the City Council, Boulder’s office market is very solid now with numerous Fortune 500 companies mixed with homegrown startups expanding or entering the marketing place. New companies to Boulder include Major League Baseball, Industrious and Amazon. Expanding local companies include Carbon Black, Gloo, Pop Sockets and Nvidia.

That said, the entrepreneurial market still remains the heart and soul of Boulder, averaging just over 900 startups per year. This large number of startups is good news for the co-working spaces, which are becoming increasingly popular in the Boulder market, with more on the way.

First-quarter overall vacancy is hovering around 11 percent with the largest vacancy of 20 percent in the East Boulder submarket. This is attributable to a few larger blocks, but activity is healthy and expected vacancy for the eastern submarket should rebound closer to 10 percent by year end. Downtown still yields the highest lease rates, with Class A product averaging close to $33 per sf triple net. However, central Boulder’s lease rates are climbing with new projects, such as Boulder Commons and Spark. Both projects, when fully completed, could add as much as 350,000 sf to the central market with average asking lease rates at $30 triple net per sf.

The impact of the new linkage fees won’t be felt this year, other than sending the wrong message to the business community. However, it will be important to carefully watch our local economy over the next 12 to 18 months to get a sense of the public’s response to the increase. Meanwhile, today the office market is still very strong with no indication of slowing down as many existing companies are looking to expand and new companies searching for options.

Article posted by CREJ