On the Radio: Housing, Growth, and Rent Control

Today between 1 and 2PM I’ll be on the “Rental Property Coach” radio show on AM 1590 talking about housing and development and, very likely, rent control. The show is recorded at this time and then broadcast on Saturday morning.

We are able, however, to take calls with questions or comments. If you have questions or thoughts about housing, growth, and the idea of rent control in Seattle, give the station a call.

You can call in any time between 1 – 2 pm at 1-866-485-1590.

As a reference point, check out two recent posts about rent control here, and here.

I will post the show’s air time and a link to the full show later.

 

Rent Control? What About Cost Control?

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Yesterday, 43rd Legislative District Candidate Jess Spear made a case for rent control.  We’ve already explained why rent control is inflationary, and a bad idea whether it is imposed by the City Council or a Roman Emperor. But how fast are rents rising? And what will make them go higher? What effect would rent control have if it took effect?

This post relies on data put together by real estate data guru Mike Scott of Dupree + Scott. The data I am citing was created for the Downtown Seattle Association (DSA) and for articles in the Rental Housing Association (RHA) newsletter.

Some people out there will rule this data out of bounds because it’s biased. That’s fine. I’ve been transparent where it came from. I am happy to see other data if it exists. My point is to inject some data into a largely emotional discussion about rents.

According to figures from the DSA, rents in Seattle increased about 5 percent per year on average since 1997. In some years it didn’t go up at all. Other years rent went down. Yes, rents go down.

Rent Change with Inflation

Keep in mind that the increase in an individual’s rent often doesn’t increase annually; instead, it often has periodic jumps. For example, if I pay $900 a month in rent, my rent might not go up for three years; then it might increase by $150. That’s a one-time increase of 15 percent, but during my time in the apartment it’s about 5 percent per year, consistent with the market.

It still might sting. But my wages and prices for everything else probably changed, too. For someone who just lost a job, getting hit with that rent increase adds insult to injury. For others who got cost of living adjustments over the same time, it might be manageable. It all depends. I am not taking away from the challenges people face, but I am also trying to point out, that on the whole, rents are keeping pace with most other prices and wages.

According to Mike Scott, in the RHA newsletter, rents tracked up at just over 3 percent in King County, roughly the same rate as inflation if we discount 2009, which had negative inflation. But what about operating expenses faced by landlords?

Between 2000 and 2013 collected [rent] revenue went up 3.7% a year while operating costs rose a little over 4% a year in King County. It’s never great when costs climb faster than revenue.

What Scott’s numbers show is that rent is tracking up, and it changes, going up and down over the years too. But the average rents are not climbing much faster than inflation and they are consistent in their climb; rents, in general, are not a volatile price.

But you have to keep in mind that costs to operate apartments are going up as well. According to Scott,

In 2012, taxes and utilities consumed 43% of total operating costs. Ten years from now they would consume 50% of total operating costs. After that, taxes and utilities continue to eat up a larger share of total operating costs every year.

So the gap between being rent revenue positive and breaking even is closing every month. That means at the current rate, without something changing, those lines will cross, and costs will exceed rent revenue. When I shared this fact on Twitter, Dominic Holden of the Stranger, Tweeted back, “Cry me a f….n’ river.”

Holden was expressing the dominant narrative that landlords have oodles of money and can afford reductions in rent revenue (he was also referencing an important American standard). But the idea that being a landlord means jacking up rents isn’t consistent with the data. In fact, market conditions being what they are have kept rents from increasing at the same rate as operating expenses. When you put that pressure on rents together with dwindling supply you have a recipe for inflation in the housing market.

All of this taken together means that rent is not rising too much higher than inflation. While one time rent increases are painful, in general they don’t happen every month or every year. When increases are averaged out over time they are about 3 to 5 percent, while general inflation is  about 3 percent.

However, the costs to operate housing–especially utilities and taxes–are rising faster than rents over all, putting more pressure on rents. Add scarcity created by lower supply and increasing demand and the stage is set for rents climbing even faster and more frequently. That’s bad for landlords, but even worse for renters.

Then why not cap increases? Why not just impose controls on rents? Rent control makes no sense because the costs to operate will still keep rising. And if we don’t build more housing or make if we make it more difficult to, price pressures will increase. Even if every unit in the city is controlled, the point will come when hard expenses will simply exceed rents. Investors won’t build housing because they would get any return — they’d actually lose money.

Rent control would have to have cost controls too, which means wage freezes and freezes on tax collections and utility payments. Operating a multifamily apartment building isn’t free, and the expenses paid for taxes, insurance, maintenance, and an array of other fixed and unfixed costs for services can only be paid with rent revenue. And there are people who make their wages providing those services; do we expect them to take a pay cut too?

This is why rent control is folly. If we build more housing, we force competition between landlords to entice renters to sign a longer lease with a free month of rent; we can also eliminate the rules and limits that make it difficult to operate a rental property. We can can also expand the the Multifamily Tax Exemption (MFTE) Program which had demonstrated success. This is how we eliminate the pressures on price created by scarcity and rising costs. That’s why we need more housing and more choices, not mandates and controls.

Will Seattle Be a Great City for Everyone, or Just a Few?

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If you’ve been following my work and the work of Smart Growth Seattle over the last few years you’ve definitely noticed that I can get pretty worked up about density and housing supply. I’ve even aggressively challenged members of the Seattle City Council over the years—some who I genuinely like—because they’ve made decisions that, in my view and the view of many others, run counter to the idea that we need more housing. Why do I get so outraged and frustrated when members of the City Council bargain away future housing units to make today’s angry neighbors happy?

Here’s why:

In Migration 1

And,

 

In Migration 2

And;

 

In Migration 3

I’ve taken these from supply and demand genius Mike Scott’s latest blog post on growth and housing. In that post he shares some amazing numbers.

Year-to-date migration into the region is up 24% this year compared to last year. A total of almost 43,000 people moved here between January and May. Even if half as many moved out, that still means there are 21,500 more people lining up at Starbucks every morning.

And not all these people are coming to Seattle. But as we’ve pointed out frequently, there are 120,000 estimated to be arriving in Seattle in the next 20 years. Who know, maybe we’ll even exceed that. Scott says for this year the new people mean that, “we have added demand for 10,000 or more housing units already this year.”

And that’s the point of growth management: growing in dense, transit oriented, and efficient cities rather than scattered widely all over the region. Putting more people in a smaller space is about efficient use of a scarce resource, land. This strategy also is better for our air, water, and reduces our carbon footprint. But that means building more housing.

It’s also good for our economy. We posted recently about a study that found our city is an “innovation cluster,” a place that is attracting lots of jobs in sectors that are creating new opportunities in the economy. And it’s true, innovative companies are creating lots of jobs.

Jobs In MigrationAnd unemployment is down.

 

Low Unemployment

According to the real estate blog Seattle Bubble,

In June the Seattle area’s unemployment rate hit its lowest level in almost six years. June’s 4.8 percent unemployment rate was comparable to the 4.7 percent level in August 2008. The national unemployment rate is still a bit higher at 6.1 percent, also roughly on-par with the same period in late 2008.

But are we adding the housing to keep up with all these jobs? According to Moretti we’re not. Here is in a recent Washington Post article on his study:

Moretti’s super-productive cities have been among the the least likely to add new housing since 1990. Decisions to build or restrict new housing are normally the realm of urban planners. But here’s what they look like to an economist: “It’s as if we have some of the most productive metropolitan areas in the world,” Moretti says, “but we don’t allow American workers to flow to these areas to take advantage of that high productivity.”

Trulia

The Trulia chart doesn’t show Seattle, but Mike Scott recently shared some data with City Council. You might remember this.

Supply Demand 07282014

Scott points out on his website that, “Demand has outpaced new supply lately. Even though developers opened 7,200 new units in the past 12 months, vacancies fell. That’s because the region added demand for almost 8,200 units in the same period.”

So the reason I get so excited is I hear the experts saying we are an incredibly amazing place to live (think Florence during the Renaissance or Alexandria under the Ptolemies); people of all incomes and walks of life want to be here because they see a future for themselves. But I don’t see us making room for them. Instead, as Moretti points out, “people are marching against Google buses when they should be marching for more housing permits.”

So yes, I get annoyed and outraged when I see our City Council in the process of making it worse, inhibiting our greatness and closing it off to the many new people, of all incomes, who want to be here by making it harder to build more housing. Great cities are open, welcoming places, full of diversity, innovation and opportunity. Will we live up to that potential, or close our gates to change?

Paul Schell: He Taught Us How to ‘Grow With Grace’

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Paul Schell, the 50th Mayor of Seattle, died on Sunday morning. I was a Neighborhood Development Manager during his administration and had the opportunity to work closely with him on implementing neighborhood plans. I also got to know he and his wife Pam personally as the proprietors of the Inn at Langley their hotel and restaurant on Whidbey Island. Schell’s passing reminds us of his legacy; Schell had a vision for Seattle as a city where private entrepreneurial spirit and development open the way for public good and benefit when neighborhoods fight for good things from growth, not against what they fear from the future.

In some ways, Mayor Schell seemed all Big City. He was a lawyer and developer who, as a private citizen, carried a lot influence. He was, when I first met him 17 years ago, when he was running for Mayor, an ‘establishment’ figure, seemingly favoring downtown moneyed interests over neighborhoods.

However, he believed in neighborhood planning as much as neighbors like me. He and I went to so many meetings together when I was a neighbor that once, when he saw me coming, he said, “you again!” But he appreciated our persistence.

Later, when I was hired to make neighborhood plans real, I found that Schell was anything but a slick downtown guy. In fact, he was true to his small town roots, more interested in barn raising than high rises.

One example was when he championed replacement of a surface parking lot in the Admiral neighborhood with a layer of underground parking in the development that was eliminating the cheap off street parking. The project was controversial because it involved using some City resources to match neighborhood and developer contributions to build an additional layer of parking to meet parking demand.

Looking back, it’s a project that now I might not support; but the neighbors and I put our efforts together the with developer and City staff and the Mayor to make it pencil. The principle was that neighbors collaborating with the City and private developers should be rewarded with City resources for trying to make growth work.

Imagine that instead of complaining about lost parking a neighborhood offered to pitch in to help replace that lost parking. Buying more parking might not be the best use of resources, but the neighborhood saw a chance to contribute, and Mayor Schell met them more than halfway, committing funds and staff time. In the end, the Council ended up killing the deal; even back then, that Council struggled with new ideas.

There were times when I wish Schell had been heavier handed, more directive. After all, the neighborhoods spent years making these plans why let a bureaucrat in the Parks Department, the Strategic Planning Office, or a Councilmember stand in the way?

But Mayor Schell was a patient guide of the neighborhood planning process. I said we should put up signs next to projects that said, “This Neighborhood Planning Success Brought to You by Your Neighbors and the City of Seattle, Paul Schell, Mayor.

That might have been his successor’s style, but it wasn’t Schell’s. In fact it was a struggle amidst the other things going on around us—WTO, Mardi Gras Riots, an earthquake, and 9/11—to get attention in the 2001 elections for the many, many neighborhood success Mayor Schell helped bring about during his time in office. In the end, he couldn’t overcome the zeitgeist and he became identified with what was happening around us rather than what he accomplished.

In truth, the Schell years was a renaissance of neighborhood activism with a purpose: to capture the value created by economic and population growth to benefit neighborhoods. Parks, drainage projects, libraries, and yes, even traffic circles were popping up everywhere. And there were few angry surly neighbors wanting to punish developers and stop growth. Many of the most skeptical neighbors in West Seattle—heart of the opposition to the original Comprehensive Plan and Urban Villages—sat around the table and planned and talked about the future.

Sadly, with Schell’s departure and the firing of Jim Diers, neighborhood plan implementation was no longer as robust. And, in my view, over the next 8 years, neighborhoods grew restless and the old suspicions about growth and change flourished. Now angry neighbors fight against growth and change, opposing density and new development at every turn.

Somehow, like Nixon going to China, it had to be a developer that could make this balance of growth, neighborhood identity, and change all work together. And Schell had a light touch, giving neighborhoods resources to process themselves into a consensus about how to change instead of leaving them to coalesce into a hornet’s nest of opposition to growth.

Paul Schell’s passing on Sunday is a personal loss. Over the intervening years I looked forward to running into Paul at the Inn at Langley when I was able to make the trip. I wish I could enjoy one last great meal there with him—no political talk, just food, wine, and travel. But this City will, in the years ahead, look back at what some saw as turbulent years as the time when Paul Schell showed us how to “grow with grace.”

Proposal On Microhousing: Let People Choose

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July 22, 2014

Dear Councilmember O’Brien,

Thank you very much for patiently engaging all sides on the microhousing issue. We understand that it is difficult to navigate to compromise or consensus on this challenging issue. However, as a city poised over the next 20 years to welcome 120,000 new people, we must find solutions to provide a variety of housing choices for all of our new citizens. Microhousing must continue to be part of that solution.

First, the current proposal is better than the proposed Department of Planning and Development proposal but not by much. Some neighbors want less density and that’s why they are pushing for bigger units and more rules. As a matter or principle, we think it is bad policy to bargain away units to make people living here today happy at the expense of new people residing here in the future.

Second, we are willing to have larger projects go through full design review and smaller ones through streamlined design review. It’s the size of the project—it’s volume and massing—that arguably has an impact on the neighborhood. We object to efforts to micromanage the lives, lifestyles, and choices of residents of the projects by mandating room sizes and sinks, for example. And we don’t support the idea of having a few neighbors dictate the decisions of builders about how to meet housing demand anymore than we’d support them making demands about what’s on the menu at a new restaurant.

That also means we don’t agree with the idea of “small efficiency apartments.” We appreciate the efforts to stretch this term as a way to both codify microhousing and to create flexibility. But it takes us backwards by subjecting projects to SEPA review based on units and needless standards that exceed International Building Code requirements.

We don’t object to SEPA process when it is appropriate, but the City has deliberately moved away from subjecting multifamily projects to SEPA review in areas rich in transit. As a matter of policy, we are, as a city, moving toward a review of projects based not on units but on overall size.

Subjecting microhousing to design review would result in unintended consequences. For example, a 4800 SF lot in the MR zone in an urban village could be developed with as many as 20 “conventional” apartments and not undergo design review.  But a microhousing project of the same exact size (floor area, height, volume) would have to go through design review simply because the units are microhousing.

Why would we single out this product for more arduous and costly process?

What we propose is the following:

  • Continue to allow both microhousing and congregate housing in all commercial and multifamily residential zones such as MR, HR, SM, C, NC, L, LR, etc.;
  • Not allow microhousing or congregate housing in single family zones
  • For projects that are 40,000 square feet or more, full design review; and
  • For smaller projects of 15,000 sf and above, a streamlined design review process.

This allows for notice to neighbors for most projects and for participation in the design process through design review. When looking at the six projects submitted in the first half of 2014 (3 congregate and 3 micro), 2 congregates with 70% of the total rooms would go through full design review and 1 congregate with 12.4% of the rooms would go through streamlined design review.  That is over 82% of the rooms and covers the larger projects that are of most concern with the neighborhoods.

The design review process, while broken, at least offers a process to achieve resolution of issues for neighbors and flexibility from design standards for developers. It also avoids the micromanagement of the inside of the buildings, which we oppose both in principle and because such interference can make projects infeasible, incentivizing larger apartments. Larger apartments will be more expensive and defeat the purpose of both density and affordability.

We would like to discuss this with you in more detail.  Thank you for your consideration.