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Seattle: A Cautionary Tale for Supply-Side Housing Advocates

Much has been made of the recent drop in rents in Seattle — not least by those who champion deregulation of development as the key to…

California State Senator Scott Wiener, second from left, displays a mid-rise apartment building in Seattle during a recent town hall on SB827. (Photo credit: AssemblyAccess)

Much has been made of the recent drop in rents in Seattle — not least by those who champion deregulation of development as the key to solving California cities’ housing affordability crisis. As State Senator Scott Wiener noted at a recent town hall meeting in Los Angeles on the topic of his proposed statewide upzoning bill, SB 827, “Seattle … has really increased its production, and Seattle rents are going down.” While, on the surface, there are some grounds for enthusiasm, a closer look reveals a situation little different from other major cities — particularly with respect to the pressures faced by cost-burdened renters.

To begin, the Seattle Times reports that the average rent in King and Snohomish counties, which contain both Seattle proper and numerous surrounding communities, dropped by 2.9 percent in the fourth quarter of 2017. While more recent data is limited, preliminary research by Curbed Seattle found that the trend of month-over-month decreases appears to be holding up, with the city on track for lower annual rent growth than both the state of Washington and the country in general.

The cause? A construction boom that saw Seattle lead the nation in the number of cranes dotting its skyline for two years in a row. Among other factors, this was the product of decades of policy changes that many in the YIMBY movement would cheer. A crucial landmark in this timeline is the statewide adoption of the Growth Management Act in 1990, which required cities and counties to develop comprehensive plans to manage projected future population growth. Development advocates have favorably compared this measure to California’s Regional Housing Needs Assessment process, not least because Washington’s bill provides strong enforcement mechanisms for jurisdictions that fail to meet their housing goals.

No “sticks” were needed for Seattle, however. The city exceeded its upper-bound target of 60,000 new housing units set out in its Comprehensive Plan for 1994–2014. This success owed much to a local government broadly supportive of high-rise construction. In the downtown central business district, for instance, a successful 1989 ballot measure called the Citizens’ Alternative Plan, which set height limits on new buildings in the area, was steadily undermined through a long series of exemptions and zoning changes, before being effectively repealed by an upzoning measure passed by City Council in 2006.

While an official city report found that job growth during this 20-year period amounted to less than half of the Comprehensive Plan’s most conservative projection, Seattle nonetheless saw the largest increase in gross median rent from 2011 to 2013 of any city in the country. An affordability crisis for households earning half or less of the area median income intensified. In response, then-Mayor Ed Murray formally dissolved the city’s ties to its 13 District Councils and eliminated the role of the neighborhood-level planning process in approving upzones and other significant changes.

Of particular significance to California’s ongoing SB 827 debate, this period also saw the introduction of Murray’s Housing Affordability and Livability Agenda — Mandatory Housing Affordability (HALA-MHA) program. In essence, this policy rezones areas near transit and other amenities to allow the construction of larger buildings than would otherwise have been permissible. In exchange, participating developers are required to either provide a portion of affordable units, or to pay into a city-managed affordable housing fund to support subsidized units elsewhere. Under its current mayor, Jenny Durkin, Seattle is presently debating citywide adoption of the program, with a number of projects already in the pipeline for pilot neighborhoods, including downtown and South Lake Union.

Yet this turn towards inclusionary zoning itself signals that there may be more than meets the eye in the city’s recent rent decrease. Indeed, both downtown and South Lake Union — two of the three neighborhoods selected for the initial MHA pilot in 2016 — were at the epicenter of the construction boom. When these two adjacent regions are considered in tandem with nearby Belltown, the combined area saw the largest growth in new one-bedroom apartment deliveries in all of Seattle, with a 379% increase in units over a 16-year period. All three of these neighborhoods were likewise key drivers of the recent citywide rent decline, with each seeing quarterly decreases of more than 6%. With no shortage of housing, why the need for further upzoning?

The answer is that, in spite of decades of indisputably strong development, Seattle’s share of cost-burdened renters has barely budged. According to ApartmentList, 46.8% of Seattle tenants paid more than 30% of their income on rent in 2016. While this figure reflects a small but meaningful decrease from the city’s 2010 peak of 50.1%, in the depths of the recession, it also represents a 1.4% increase over the rate in 2006, a decade prior. The housing affordability crisis persists.

For those concerned with social equity, then, there is little to cheer in the recent drop in Seattle rents. It is, in the first place, primarily owed to an overproduction of luxury housing, a nationwide phenomenon resulting from years of lax underwriting standards in commercial real estate (CRE) lending. The Seattle Times reports that “about two-thirds” of newly opened apartments in the downtown core are vacant. In nearby South Lake Union, the vacancy rate increased from 4.6% to 7.1%, excluding brand-new buildings, in which “about one-third of apartments are sitting empty.”

This story is nothing new — in fact, the same top-end-driven decline has already taken place in Los Angeles, where rents dropped slightly last October and are expected to continue to mildly decrease through 2018; in San Francisco, where the trend began in early 2017; and in New York, which saw a 3.7% decline for one-bedroom apartments and a 5% decline for two-bedrooms last year. The Seattle Times quotes Greg Willett, chief economist for the rental data firm RealPage, as observing that “frankly, Seattle is the last of the really big markets to see this (cool-down) trend develop.”

And while Seattle’s average rent of $1,647 would be readily affordable to a household earning the area median income of $80,349, a different picture emerges when these statistics are broken out by race. As of 2015, the median income for Hispanic households in Seattle was $49,000, and for black households, just $37,000. The city’s Central District, which was more than 70% black in 1970, has long since become a majority white neighborhood, with blacks comprising less than 15% of the current population. A long-standing trend of displacement and gentrification continues unabated by redevelopment, with the District coming in second citywide for the most home teardowns for new construction since 2015.

In turn, the suburbs that have seen increases in their black population in recent decades are experiencing few or no benefits from rent declines stemming from the urban center. While Renton, 11 miles southeast of the Central District, saw both a yearly increase and a quarterly decline that were slightly less than the overall Seattle averages, rents in more affordable Kent, to Renton’s south, rose by 7.8% year over year, with no change in the last quarter of 2017. South of Kent, in even more affordable South King County, a modest 0.7% quarterly decline was offset by the second-highest yearly increase in the bi-county area, at 8.5%.

Thus, by overbuilding housing for the wealthy, Seattle has achieved some short-term improvement in affordability for the middle class, at the expense of substantial displacement and continued upward pressure on the most vulnerable. In this, it is similar to California as a whole, with the state’s 300,000-unit surplus for above-moderate income earners, in spite of Seattle’s proportionally superior housing production. As the city considers a greater emphasis on inclusionary zoning, even supporters of robust development have begun to question some of the core assumptions of supply-side models. Local advocates of HALA-MHA have argued for replacing simplistic supply-and-demand graphs with the bid-rent curve, which better represents why simply adding units fails to produce equitable outcomes for lower-income households.

Yet the MHA program is likely to face headwinds, with the city’s $49 average rent decrease going hand-in-hand with the sharpest decline in development in more than a decade. Optimistically, the slowdown may present a valuable opportunity to revisit key details of the ordinance. In downtown Seattle, the Sheridan Building, comprising 56 units renting at between $990-$1170 a month, is under consideration for market-rate redevelopment. While the previous “housing bonus” system required 1-for-1 replacement of “naturally occurring” affordable units like these, the MHA program does not. Instead, the developer would only need to include 18 affordable units, or pay a fee to subsidize the creation of 18 affordable units elsewhere in the city, resulting in a net loss.

As California contemplates its own, statewide, upzoning measure, the example of Seattle can serve as an instructive lesson in the limits of supply-side solutions for addressing the woes of cost-burdened renters.