Does It Pencil?



A real estate term used by developers when they’re assessing whether a project makes financial sense.

This article is part of Shop Talk, a regular feature that explores the idioms of the business world: the insider jargon, the newly coined terms, the unfortunate or overused phrases.

The exploding cost of housing has prompted cities, states and the Biden administration to create a raft of programs aimed at getting developers to build housing people can afford.

Why aren’t developers doing this on their own? Why do they keep churning out McMansioney farmhouses and luxury apartment towers when so many Americans desperately need a budget-friendly place to live?

When public officials ask these questions the answer is often delivered through a real estate cliché: It doesn’t pencil.

A project that pencils is one that makes financial sense. Real estate is a risky industry, subject to heavy regulation, a boom-and-bust cycle and floating interest rates that can take a project from successful to bankrupt in the space of a Federal Reserve meeting. When developers say something pencils, they are saying that whatever they want to build has a chance of making enough money to overcome the many chances of failure.

“The essence of ‘Does it pencil?’ is that you can take a large swath of information and reduce it to a one-number answer,” said Joe Still, a broker who runs a series of real estate courses called “Does It Pencil?” (Prices begin at $199 for five hours of instruction.)

Most of the time, a project that pencils is more than just profitable. Investors in a new apartment or condominium project often expect to double their money — or more — in four to five years.

Builders rarely break this down in public meetings. The pencil metaphor often comes out when the developer is asking for public assistance or heading off a request to do something expensive, like change the design or lower the rents.

Over the past five years, the combination of rising inflation and higher interest rates has made development far less lucrative than it was in the run-up to Covid. Rent and home prices are still too high for many Americans, but they have stagnated somewhat. This has slowed development because developers are worried about their future profitability — that is, they worry that they no longer pencil, according to a recent report by the Terner Center for Housing Innovation at the University of California, Berkeley. (The report was titled “Making It Pencil.”)

Given that the vast majority of new housing is built by private developers, most of the government’s housing programs are attempts to make things pencil. Section 8 rental vouchers pay a portion of the market rent for low-income tenants, making those tenants pencil. The low-income-housing tax credit gives corporations a break in exchange for an investment in low- to moderate-income housing developments that can’t pencil without help.

As rental burdens move upward, states have started creating “work force housing” programs that target richer renters. A number of state and local governments have also started to float the idea of building new public housing. Public housing doesn’t pencil, of course. That is, in fact, the point.

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