Letter to Seattle City Council – Apartment Glut; Just add Upzones

by Jon Lisbin

Hello Council members,

Thank you for your hard work trying to address the affordability crisis. I know you have good intentions but it’s increasing looking like the Grand Bargain is too little, too late, legally challenge-able and potentially destabilizing to the housing market.  According to the Dupre+Scott Fall 2016 Rental Market Trends, we are seeing a moderating effect on rents in Seattle.   This is due to unprecedented apartment development (50,000 new units in the Puget Sound between 2015 and 2018).

But wait, there’s more. If you look at the in-city Seattle market where a lot of the new units are happening, between the stadiums, Ship Canal, Lake Washington, and Puget Sound, the impact of new construction on rents is even more obvious. Adjusting for new construction, rents went up just 3.9% in the past twelve months. That’s down from 8.4% a year earlier. We expect the rate of rent increases to slow further as more new units open over the next few years. And survey respondents agree. Last fall 72% of the survey respondents told us they planned to increase rents in the next six months by an average of 2.9%. They were close. Rents rose 2.6% between last fall and this spring. Now only 32% say they expect to raise rents by next March. As a result, we expect rents to increase about 1.5% by spring. Oh what a difference a year makes.”

According to this report rent increases will be lower than inflation by the spring.  This is good news for renters but is fair warning of an impending apartment glut that could have serious consequences on our economy.  Particularly if the city fans the flame with “upzones.”  As you know, real estate markets are cyclical and the market is self-adjusting. A government intervention, at this point, could lead to a real estate market collapse; severely straining a revenue source the city is overly dependent on; construction sales tax. (Figure 1)

annual-sales-and-bo-tax-revenue-growth

Source: Seattle City Council Insight

Not only should the city let market forces play out without interference but it would be advisable to immediately diversify revenue streams with legal GMA Impact Fees, which the city council has already studied.

From the City of Seattle’s Impact Fee Assessment, “The City (and the School District) currently fund a large portion of capital programs for each facility type eligible to receive GMA impact fees with property taxes and bonds to be funded with future property taxes. A GMA impact fee program could augment these funding sources by contributing to the incremental additional capital costs that are development‐driven.” 

Couldn’t have said it better myself. This is not false news nor alternative facts.  These are the facts and, as public servants, you are accountable to your constituents for the decisions you make.  Please consider these facts as you decide on the merits of this policy decision.

 

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2 thoughts on “Letter to Seattle City Council – Apartment Glut; Just add Upzones

  1. You’ve spent the years trying to convince people that increased supply doesn’t lower rents, and now that evidence is starting to trickle in to the contrary, you’re going to pivot and say that lower rents are a bad thing?

    • Thanks John. Yes and no. What I have been saying is that increased production doesn’t drive down average rental rates because new construction is comprised primarily of expensive luxury units. This actually drives up the overall average rents. However, when you slice the data differently, and take new construction out, we’re obviously seeing the effect of market forces on what’s left over.
      What I did say in this blog post is that it’s a great thing for renters that rent increases are moderating and the market is returning to equilibrium. For the city however, if they intervene with unnecessary upzones, it could be a very bad thing because it could cause a market collapse and deprive the city of funds they are over-dependent on; construction sales tax. I hope I am wrong because it looks like the city is going ahead with the upzones.

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