Has Seattle Reached its Emotional Limit on Growth?

kleenex

Danny Wesneat has a mixed record on writing about growth in Seattle. His most recent column, “Seattle’s latest growth industry: bemoaning what’s been lost,” has the following paragraph:

But I do wonder: When we’ve taken to memorializing even the loss of our grocery stores, maybe the pace of change has pushed us to some sort of emotional limit?

 

I think Westneat buried the lede or at least the most important question. As I discussed at Forbes last week, Seattle’s liberal progressive freak out about the election of Donal Trump begs the question: what are you really upset about Seattle?

On Black Friday I ran into a fellow Capitol Hill resident who is an opponent on growth issues. We get along personally and often joke and tease each other about our differing points of view and the ones we share (eg the City is largely annoyed an unresponsive and deaf to criticism from both of us).

Each of us kind of had a hard time understanding how Seattle’s Mayor would make a big show of how Seattle would stand up to Trump, while at the same time using prisoners to sweep homeless encampments. The Mayor and the City Council trip over themselves to wrap themselves in progressive ideology while at the same time promoting policies that limit housing growth and production and crack down on local refugees living in encampments while calling the city a sanctuary.

Knute Berger at Crosscut even wrote a self-congratulatory post about how people terrorized by Donald Trump could come to Seattle. That’s funny if it wasn’t so sad. They’ll have a tough time given the fact that our city’s leaders continue to indulge in rhetoric while enacting policies that ensure housing will just get more expensive and, for those who are homeless, create a hostile environment.

So has Seattle reached its emotional limit? Not yet I guess. Instead Seattle is like a tired child having a meltdown in the grocery store when he can’t get what he wants. Seattle is engaged in a slow motion breakdown, complete with rages and tantrums about growth and change, ugly buildings and tech workers and weepy, nostalgic interludes about one business or another closing down. Perhaps the kicking and screaming and self-pity will burn itself out. But it hasn’t shown signs of abating yet.

Meanwhile, some of us will continue to hold on to the bright side of change (see Bryan Kirschner’s post about prosperity) and urging members of the media to do the same. When you’re all done having your fit, and you dry your eyes, we’ll be here waiting with ideas about how we can increase the production of housing of all kinds, in all parts of the city, for all levels of income including leveraging the progress homeless people have made with encampments. Until then, here’s a box of kleenex.

 

Again and Again: MIZ Raises Housing Prices to Fund an Inefficient Subsidy System

Here I go again. Mandatory Inclusionary Zoning (MIZ) is an inflationary intervention in the housing market that simply adds what amounts to a unauthorized tax to new housing and commercial space. The money generated from the tax will end up being poured into a grossly inefficient system of subsidized housing production that will create very, very expensive housing with long waiting lists. Renters and owners in non-subsidized housing units will pay for the new and scarce subsidized housing. But sometimes the social critic or writer or advocate has to be repetitive, especially when the people in charge keep repeating the same mistakes.

One of my heroes is Phillip Glass. Glass is a composer and could easily be called a minimalist. While minimalism is not just repetition, many people would say that Glass’ repertoire is, well, repetitive. My college roommate said one piece sounded like people beating on pots and pans. Here’s John von Rhein from the Chicago Tribune describing Glass.

Glass’ musical style is instantly recognizable, with its trademark churning ostinatos, undulating arpeggios and repeating rhythms that morph over various lengths of time atop broad fields of tonal harmony. That style has taken permanent root in our pop-middlebrow sensibility. Glass’ music is now indelibly a part of our cultural lingua franca, just a click away on YouTube.

Minimalism and the Glass’ music is kind of like anchovies, cilantro, and Chinese Opera: you either like it or you don’t. The same is kind of true of MIZ, you either like it or you don’t. But it bears repeating, MIZ doesn’t address the broader problem of rising housing prices; in fact, MIZ makes housing more expensive. That in turn will drive the demand from non-profits for more money for more units of subsidized housing. So here’s a reprise of things I’ve written over the years about why raising prices on housing to fund expensive and scarce subsidized housing makes no sense.

MIZ is an unauthorized and inflationary tax. This post was about the linkage tax, something that was set aside in favor of MIZ. But MIZ is just another way to levy a tax on housing to pay for expensive subsidized units. And speaking of rinse-and-repeat, check out what I call the “San Francisco Death Spiral,” the annoying and dangerous tendency to worry about price, impose inflationary rules, fees, and taxes, watch prices rise, then complain about prices, then adding more rules and fees.

http://www.djc.com/news/ae/12071370.html

So all the cash squeezed out of new development will end up going toward non-profit produced housing funded also by Low Income Housing Tax Credits (LIHTC), and subsidies from various other governments and programs. Here’s a post about why it’s so pricey. I’ve pointed out that CHIP’s project, 12th Avenue Arts project cost $47 million for 88 units and El Centro de la Raza’s project on Beacon Hill came in at $45 million for 112 units and a 5 year waiting list. Each of these are beautifully executed projects and will house real people that need housing, but can’t we be more efficient?

http://www.smartgrowthseattle.org/why-is-afforable-housing-so-expensive/

If we were more efficient be cutting the undergrowth and accretion of rules, regulations, fees, reviews, process, and delays for housing we’d get more housing; a significant amount of housing. I estimated, conservatively, that we could create about 100 units of housing a year, that’s like one 12th Avenue Arts project each year, just by reducing rules and fees. Here’s a series of posts about this potential, including a study from California I used.

http://www.smartgrowthseattle.org/cut-rules-half-create-1960-affordable-housing-units/

SPUR Analysis of Costs

http://www.spur.org/publications/urbanist-article/2014-02-11/real-costs-building-housing

Forbes Post on Costs of Rules

http://www.forbes.com/sites/rogervaldez/2014/10/27/want-more-housing-make-fewer-rules/

The California Study

www.hcd.ca.gov/hpd/docs/FinalAffordableHousingCostStudyReport-with-coverv2.pdf

Here’s a post written by our former intern, Tianyi Xiang, that breaks down some of the factors and variables that contribute to the costs of housing projects.

http://www.smartgrowthseattle.org/bricks-mortar-costs-affordable-housing/

And here is my plea that non-profit housing developers band together with us, advocates in the market rate sector, to lower costs. Non-profit housing developers are listened to and believed. They have all the political clout in the housing discussion and policy-making arena. If they pushed hard enough, we could all reap the benefits of lower costs that limit supply and boost prices.

http://www.forbes.com/sites/rogervaldez/2016/07/12/when-will-affordable-housing-advocates-push-for-more-supply-fewer-rules/#2d7eee3369aa

I first discovered the music of Phillip Glass on Thanksgiving Day, 1983 when I was 13 years old and saw Godfrey Reggio’s film Koyaanisqatsi. The film had an enormous impact on me and I went back and saw it several times. Reggio’s purpose was to call out the futility and folly of modern life, that life he argued in images and with Glass’ music, is “life out of balance,” the translation of the Hopi word, koyaanisqatsi.

What Reggio and Glass accomplished, however, was the redemption of that folly by showing how beautiful the folly of life truly is from a distance and perspective. Even in the second film, Powaqquatsi, the opening scene of workers at the Serra Pelada mine in Brazil, the site of environmental degradation and human suffering on a massive scale, ends up being beautiful. Reggio, who trained for years to be a monk, set out to use the rhythm of images and music to distract us from our unhappiness, but ended up, with repetition, also showing us how beautiful we are, even in our suffering. I only wish my blog posts on MIZ could do the same.

The clip I feature is from a segment called Pruitt Igoe. Pruitt Igoe was a large public housing project in Saint Louis that was abandoned and demolished. Pruitt Igoe and other well-known, large, publically owned housing projects were criticized as concentrating poverty. The end of Pruitt Igoe and Cabrini Green marked a shift away from publically owned and operated housing and would be replaced with the Reagan era Low Income Housing Tax Credit program which is a significant source of funding for the non-profit affordable housing industry. I think it’s time to reexamine our abandonment of public housing (I touched a bit on this issue here) in favor of the inefficient system we now have. But that’s a separate post I think.

 

Take the Survey on Minimum Room and Dwelling Unit Sizes

IMG_7882.JPG

I’ve been serving on a subcommittee of the Construction Code Advisory Board (CCAB) on smaller living spaces. I know, what’s the CCAB? Well, the CCAB is a hard working group of experts in various fields of construction and building that review changes to the building code. The building code is a powerful way of ensuring basic health and safety. Their role is very different from design review or other committees that look at land use and zoning. The CCAB talks about stairways, elevators, fire exits, and, yes, the size of units and rooms.

You’ll remember David Neiman’s various posts about how new land use regulations and interpretation of the building code have been working together to push up the size of units. As we’ve explained many times before, larger units mean fewer units in buildings. Fewer units means more expensive units since the rent that has to be collected to cover costs has to come from fewer households. It’s just math. Imagine a Thanksgiving meal where the food bill will be shared by everyone at the table. If there are 10 people paying for the same amount of food as 7 people, the costs for the 7 will be higher per person. But wouldn’t they eat less food? Exactly. Lots of people want less space and less rent. Smaller spaces allow that to happen.

What the CCAB is considering is allowing more flexibility in how the building code permits smaller living spaces, in particular units and rooms. The two are distinct. The unit is the whole apartment, while a room is a room inside the apartment. Sometimes, like in my apodment, the two concepts pretty much overlap. In the house where I group up, the unit had three rooms along with baths and separate living rooms. What we’d like to see is lots more flexibility as units get smaller to allow for more, smaller sized units and rooms. This is what people are saying they want, and it’s a great way to create affordable housing units.

So the CCAB is conducting a survey and you ought to participate. Below you’ll see the preamble to the survey and you can get the survey by clicking this link to  the Minimum Habitable Space Survey. It will take a bit of time, and feel free get in touch with questions about this. You can email the survey to Jenifer.gilliland@seattle.gov

——————–

Hello,

The City of Seattle is committed to affordable and livable housing. Housing unit size directly impacts affordability and livability. The Seattle Construction Codes Advisory Board (CCAB) is conducting a review of the 2015 Seattle Building Code (SBC) Section 1208 Interior Space Dimensions & Director’s Rule 7-2016 for Small Efficiency Dwelling Units. CCAB has been asked to explore whether Seattle’s approach to minimum room and dwelling unit sizes, dimensions and total area can be more flexible without impacting the health and safety of Seattle residents.

We need your thoughts!  A subcommittee of the Seattle Construction Codes Advisory Board is conducting a simple, informal survey to gather information and surface issues and potential options about its current minimum room and dwelling unit size requirements.

You will need to complete this survey in the next few days if you wish your input to be reviewed by the subcommittee.  The due date is November 26th at 5:00 pm.  Please send all surveys to Jenifer Gilliland  at Jenifer.gilliland@seattle.gov.  If there is someone else you know that could provide us with valuable information on this topic, please send us their contact information and we will send a survey to them as well.

Thank you in advance for your time!

MIZ Example: No Value Exchange, Just Higher Prices

judkins-post

I’ve been writing about the problems with Mandatory Inclusionary Zoning (MIZ) for a long time now. In short, MIZ is infeasible, inflationary, and most likely illegal. The idea of extracting money to pay for rent restricted housing might be a good political solution but it would add costs that would make some projects infeasible and when they did pencil, it would be because prices would have gone up to offset the financial impact. It’s worth taking a closer look at how the current MIZ creates feasibility problems that can only be improved when the price of housing goes up – if it can.

A 4 Unit Townhouse Project: Before MIZ                     

The example we have put together is a townhouse project in Judkins Park. Most of the assumptions are in the following table.

judkins-l2-4-units-before

The most important number to watch on the table as an indicator of feasibility is the Loan to Value measure or LTV on the far right. Contrary to what some people might think or believe almost every development project in the city is built with borrowed money either from investors putting in cash with an expectation of a return payment or a bank that is charging interest. No matter where the money is coming from, there is always a measure of the debt to the value of the project.

In the case of multifamily housing projects financing over a period of years, this is usually called a Debt to Credit Ratio or a DCR and in townhouse or single-family projects an LTV. A DCR is usually expressed using decimals with an optimal DCR being around 1.20. Roughly, this means that for every dollar borrowed, the project must produce at least $1.20 in income to cover the operations of the project and the debt service. In a for sale product, the LTV is an indictor of the coverage of the borrowed money compared to the anticipated value of the sale at closing. An optimal LTV would be about 80 percent. As the LTV goes higher, lenders and investors are unlikely to provide funding, since for them it is a measure of risk. The lower the LTV, the more likely the project will produce the required return on investment.

This project currently is meeting that minimal expectation with a unit sale price of $599,000. It’s important to understand that the lender or investor also sets the price based on what they believe the market will bear. If the LTV is 65 percent, but the price of the product seems way too high, the lender will push back and demand a lower sales price. In other words, the bank might not believe that this particular product, in this neighborhood will get $599,000. If that’s the case the project won’t happen. Other options are to find ways to lower costs.

Every development project goes through this feasibility phase in which costs, the market price, and the potential return and risk are all vetted and discussed. Every party in the transaction wants to be sure that at the end of the 12-month period, they’ll be able to walk away with a return on the investment that justifies the risk. If there isn’t any confidence in this, the project won’t get beyond this phase, the land won’t be purchased, contracts won’t be put out for bid, and whatever sits on that 5000SF lot will remain.

A 4 Unit Townhouse Project: After MIZ

So what happens to this project when MIZ is imposed?

The assumptions for this project includes that it is in an area designated as “Low” under the MIZ requirements imposed by the Mayor’s Mandatory Housing Affordability (MHA) legislation. The “Low” designation indicates areas deemed to have low rents or lower priced housing. However, after the Mayor got together with Councilmember Lisa Herbold several weeks ago to devise a Displacement Index that would boost the fees and inclusion rates in those areas (supposedly to avoid “displacement” created by new housing, this project is now in a “Medium” area.

The Medium-MHA geographic area is expanded to include formerly Low-MHA areas: North Beacon Hill, North Rainier, and Columbia City, Northgate, and Crown Hill. Development in these areas will be subject to MHA Medium amounts that range from 6% to 10%. These changes increase the area citywide where high and medium MHA payment and performance amounts apply.

judkins-1325

So what happens to the project when it pays $13.25 a square foot for the in lieu fee (and remember builders pay for additional square feet whether they use it or not, and here that’s 500 SF or about $6000)?

judkins-park-after-mha
It’s important to note that the builder said this about the additional square footage that comes along with the MHA program:

I would not build the additional [square footage] granted by MHA in this project.  It doesn’t make financial sense to build the additional SF.  You would have to build a fourth floor and the market doesn’t like fourth floors and wont pay the normal sales per SF for a 4th floor.

Also keep in mind that the additional construction costs for the fourth floor if it was built would also add costs to the project. I’m not going to do the math all the way through here, but building the additional square footage would add to the sales price of the unit and to the loan amount, but there would also be some additional expense. However, the builder of this project says people (the market is people after all) aren’t buying 4 story townhouses.

But just as important, notice the change in the LTV; it’s now at 80 percent. That change means banks or investors won’t provide the needed capital for the project, so the project won’t happen. What the builder can do is find additional sources of funding to cover the new costs. He could also find a way to lower construction costs or he could find another lender willing to take more risk.

But what is the most likely scenario? The price for the units will increase, provided people looking for homes are willing to pay more for this product in this neighborhood.

judkins-park-after-mha-and-price-boost

There you have it. Fees imposed will either slow production by putting projects out of feasibility or prices for housing will go up to absorb the additional costs, provided people can and will pay the higher prices.

Let’s look at one more possibility. What if the builder used the additional 500 square feet granted for the fees being charged?

davids-take-on-judkins

The additional “bonus” square footage offered by the City’s MIZ proposal doesn’t help very much even if it can be used on the site and without the price boost, actually lowers the per square foot sales price ($399) if the price stays the same, $599,000. Instead, in this case, those extra square feet have to be offset with an additional $50,000 on the price and the LTV is still too high. As I’ve said before, the City’s MIZ program is not a value exchange program but an exaction. What happens in this example is either nothing when the project doesn’t pencil, the price of the housing goes up to make it work, and even when the additional FAR is factored in, it doesn’t produce much vale for the hassles and costs associated with it.

There a many other lenses to view this example, including the City’s argument and assumption that the price of the land would go down exactly as much as the fee. We can argue about that all day, but what I hear from people who make housing is that this simply won’t happen, and if it did, the owner of the land with a single-family house in this zone would just sell it to someone who wants to live in it, not for development. That means a loss to the market of 4 houses; and, importantly, $0 in fees for the City.

Finally, this example is for discussion. Each and every project will have different up sides and down sides. But what we know doesn’t help production is additional costs and process. What will happen isn’t so much that builders will discover this impact as they build, but the new fees will get baked in essentially to production. Housing production will go on once prices go up enough to simply include the fee in the cost of doing business. This same scenario will play out with other kinds of housing too, including apartments. That’s not a good solution for people who say we’re having an affordability crisis in housing. It’s time to reconsider this intervention and exchange it for one that would have a beneficial impact on price.

 

 

 

Election Day: Burke, Democracy, and a Vision of the City

It’s difficult on Election Day for me to not get historical and philosophical about the big day. This year there seems to be a lot at stake for people across the country and right here at home. When I consider our democracy I can’t help but think about Edmund Burke, perhaps the most overlooked of thinkers about democracy. When I am at my most frustrated with City Hall, to the point that wish we could have a revolution, my frustration is always tempered by Edmund Burke’s take on social and political change.

The American story is frequently told as one about a group of smart, motivated and even inspired men, taking a stand against an absolute monarch, and succeeding in overthrowing that regime, inventing a new one, and implementing that in the form of a written constitution. However, this popular conception is simply false. Far from being an overthrow of an absolute monarch, the American Revolution might be better named the American Revision; the revolution was predicated on the fact that the men in question argued that they weren’t getting what they deserved under the existing English Constitution.

I’ve written much more about this elsewhere, but simply put, the motivation of the American revolution wasn’t about overthrowing tyranny as much as it was about reclaiming what was due, just like people protest and agitate in our own time in our own country because they feel their existing and undisputed rights are being violated. This kind of agitation is far from a revolution but rather an assertion of the rights due under the constitution and the law; it is an affirmation of the existing assumptions about the bedrock and foundation of the society. It is like claiming an inheritance, an analogy that will be important later.

Burke’s view on rights, freedom, and change is probably best found in his Reflections on the Revolution in France, a long letter to a young man who supports the French Revolution. Unfortunately, the Reflections are almost unreadable today both because of Burke’s 18th century writing style and his extensive historical references that are challenging to track even for someone who has studied English and European history. Here’s a quick summary.

studio of Sir Joshua Reynolds, oil on canvas, (1767-1769)

Edmund Burke by Sir Joshua Reynolds, oil on canvas, (1767-1769)

In the Reflections, Burke challenges a mischaracterization of the Glorious Revolution in England of 1688 as being a revolution that somehow elected William and Mary King and Queen. The settlement, argues Burke, was not anything of the sort. Rather, the revolution was the establishment of liberties and the succession of the monarchy, not an election of a King by the parliament. Burke’s view is that the orderly succession of monarchs was inextricably linked with liberties. Without the predictability of orderly succession freedom would be impossible.

The people of England will not ape the fashions they have never tried, nor go back to those which they have found mischievous on trial. They look upon the legal hereditary succession of their crown as among their rights, not as among their wrongs; as a benefit, not as a grievance; as a security for their liberty, not as a badge of servitude. They look on the frame of their commonwealth, such as it stands, to be of inestimable value; and they conceive the undisturbed succession of the crown to be a pledge of the stability and perpetuity of all the other members of our constitution (41).

Furthermore, this orderly transition of power was more than a tradition but an inheritance, something that derived from many generations of evolution and something passed on from one generation to the next.

The idea of inheritance furnishes a sure principle of conservation, and a sure principle of transmission; without at all excluding a principle of improvement. It leaves acquisition free; but it secures what it acquires. Whatever advantages are obtained by a state proceeding on these maxims, are locked fast as in a sort of family settlement; grasped as in a kind of mortmain for ever. By a constitutional policy, working after the pattern of nature, we receive, we hold, we transmit our government and our privileges, in the same manner in which we enjoy and transmit our property and our lives (56).

So as unhappy as we may be with the results of our current iteration of democracy, it is still our inheritance. Burke might say that if we inherited a house we didn’t particularly like, we wouldn’t burn it down, we’d improve it even if it were at some expense. Why? Because it is something we’d have to leave to the next generation, to our successors. We have an obligation to maintain and improve what our system has given us and to hand it to the next generation in better shape than we found it.

This is why Burke bitterly opposed the French Revolution, an uprising that essentially burned down the house; meanwhile he supported the American Revolution because the founders were fighting for their inheritance of rights that belonged to them in the first place through the English Constitution. It is a distinction easily lost more than 200 years later but one that is still critical to understanding social change. This view is what makes Burke a founder of what we call today conservatism, social change that recognized the importance of tradition, the needs of today, and future generations along with a liberal view of economics.

Statue of Burke in Washington D.C. The inscription on the statue is, "Magnanimity in politics is not seldom the truest wisdom."

Statue of Burke in Washington D.C. The inscription on the statue is, “Magnanimity in politics is not seldom the truest wisdom.”

A Burkean view of the city would be one that would hallow a city’s history without privileging its past over its future; it would value the needs of current residents without shutting out the interests of future residents; it would recognize that efficient use of limited resources like land ought to be incentivized while excesses would be discouraged. This vision of the city would be one that would manage and improve the lives of people today and ensure others might enjoy it into the future.

Instead, our leaders today have a fearful view of the future and a nostalgic view of the past. To them, conservation means burying what we have in a mattress, slowing growth and housing production with rules and taxes. But I have hope that, over time, if we stay engaged with the system we have, no matter how imperfect, Burke’s view will prevail; it’s the only sustainable option we have.