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After years of building, Seattle gets a new year’s gift: falling rents

Posted by on January 4th, 2016 at 11:45 am

DSC 3249

New homes in Ballard, Seattle.
(Photo: Bejan)

The Portland metro area was one of the fastest job creators in the country in 2015, but a familiar neighbor has been neck and neck on that measure: Seattle.

The city to Portland’s north has ridden the success of Amazon and Microsoft, among others, to the country’s third-highest average wages. (Portland ranks 10th.) But all the money has come at a cost: Seattle rents are 20 percent higher than Portland’s, on average.

That isn’t likely to change any time soon. The most walkable and bikeable parts of Seattle remain even further out of reach for poor people than the most walkable and bikeable parts of Portland do today.

But Seattle’s recent real estate news suggests one way to at least stop rents from going even higher.

The trick, according to the Puget Sound Business Journal: give richer people somewhere to move that is not currently occupied by a less rich person.

This is from a Nov. 23 PSBJ article (written, naturally, from the perspective of a landlord or developer who would be horrified by falling rents):

It’s not demand that has Seattle apartment landlords worried. It’s supply. …

There are 22,000 units projected to open this year and next. Combine that with the 7,400 units developers opened last year – the highest level of production seen locally since 1991 – and it’s easy to see why landlords are concerned.

“It’s interesting right now because supply, I think, is definitely having more of an impact and a drag on the market right now more than anything else,” said Pettit during a Bisnow event.

There are some reports that occupancy rates in some newer buildings that have been open for a couple years are as high as 97 percent. Basically, the buildings are almost completely filled. But that’s not what Pillar Properties is finding when checking in with competing landlords. Their teams are telling Pillar’s that occupancy is actually only around 92 to 94 percent.

This means rents won’t increase at the rate that some sources say they will, Pettit said.

The issue of slowing rents is most acute in Seattle neighborhoods that are experiencing an unprecedented amount of development, according to Dupre + Scott Apartment Advisors.

And here’s a follow-up article from last week, drawing on more recent data:

The big warning sign for landlords is what the report says is “price resistance” in the most expensive submarkets: the downtowns of Bellevue and Seattle, including Belltown and South Lake Union, and Sammamish/Issaquah. After increasing during the first three quarters, rents dropped this quarter in all but South Lake Union, with the average decline hitting $59 a month. Further, when all of these submarkets are considered, the average vacancy rate increase was nearly a full percentage point.

Meanwhile, across all markets, more landlords are offering tenants sweeter incentives, such as free rent. The average value of incentives is $15 a month this quarter, which is nearly double what it was last quarter, when 16 percent of landlords were offering incentives. Now 20 percent are.

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Portland is adding homes too, but rents have been anything but stable
townhomes on ankeny

Townhomes on SE Ankeny.
(Photo: M.Andersen/BikePortland)

For Portlanders, this news from Seattle raises a question: with all the building we’ve seen 2014 and 2015, could the same thing be happening here?

Not yet.

“Portland’s multifamily market continues on a tear without any signs of slowing down,” Portland real estate analyst Norris, Beggs and Simpson wrote in their third-quarter report on local multifamily rents. “Though the rate of construction has subsided, capital continues to flood the market.”

Here’s a chart from NB&S showing how rents have edged up only slightly for new units, while the rents for older units (euphemism: “seasoned”) have leaped more than $150.

rental rate comparison

Data source here.

The $100 per month rise in the price of the average Portland rental unit has been devastating for lower-income Portlanders. Remember 2014, when the Portland Business Alliance was up in arms about an “incendiary” citywide income tax for transportation that would have topped out at $900 per year for people making more than $333,000?

In the year that followed, the average citywide rent rose $1,200 a year.

Did you notice the Portland Business Alliance (which is the regional chamber of commerce) hitting the panic button about the effect that will have on the business environment?

Yeah, we didn’t, either.

Seattle has been adding people faster than Portland, but adding new homes faster still
DSC 3247

(Photo: Bejan)

If new building seems to be helping Seattle slow its rent increases, why isn’t the same thing happening in Portland?

Though it’s a little hard to compare one city’s building rate to another, one way to start is to use Census figures to calculate the number of new homes permitted per resident. Here’s what that looks like for Seattle and Portland over the last 10 years:

permitted building units per capita

2015 data for Seattle assumes constant trend for 2015 based on first nine months. Data from Portland assumes constant trend for 2015 based on first eight months. Seattle data source here. Portland data from Bureau of Planning and Sustainability and Census Bureau.

Over the 11-year period, Seattle has added 66 percent more new units per capita than Portland. That’s mostly because of the huge surge it saw in 2009 and 2010, when development in Portland slowed to about 1,000 units per year but 1,000 new Portlanders were still arriving every month.

A big reason Seattle has built more, no doubt, is that housing prices there have been higher. In a housing market that’s overwhelmingly funded by the private sector, the best way to create more housing is for the new units to be worth a lot of money. Unless taxpayers are chipping in too, that’s the only way it works, unfortunately.

So this isn’t a sign, sadly, that the current U.S. housing system is ever capable of returning the rent in a growing metro area to the level you might see in a metro area that isn’t growing. (The years of very low Portland rents, from 2005 to 2007 or so, happened mostly because Multnomah County was going through its first population decline in decades, caused by a severe, localized unemployment problem in the early 2000s.)

But this story from Seattle is a sign of the role new building can play in the housing market. Unless there’s an economic crash, building can’t make things better for poorer renters. But it can sometimes stop things from getting worse.

Most growing U.S. cities solve this problem by building their new homes at their outskirts. In the last 25 years, Portland has avoided this fate. Assuming we continue to do that, one of two things is going to happen:

  • Housing prices in Portland’s bikeable core are going to keep climbing and climbing, which will change what sort of people live there even more than rising rents already have, or
  • The buildings in that core are going to have to change even faster than they have been.

Happy new year, Portland. Pick your poison.

— Michael Andersen, (503) 333-7824 – michael@bikeportland.org

The Real Estate Beat is a regular column. You can sign up to get an email of Real Estate Beat posts (and nothing else) here, or read past installments here.

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maccoinnich
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If Portland isn’t building enough housing to keep up with demand, I’m curious about what–if anything–can be done at a local level to change this. The most obvious answer would be to dramatically expand or remove the Urban Growth Boundary. But given that the increase in prices in the city cores is a nationwide pattern, I’m not sure that building more houses on the periphery would do much to alter affordability in inner Portland.

Upzoning to create more development capacity in inner Portland might help, but seems unlikely. We’re coming to the end of the Comprehensive Plan process, which is for the most part leaving the status quo intact. There are some height increases proposed in Downtown, the Pearl and the Lloyd District, but no corresponding increases in maximum Floor Area Ratio (FAR), which is usually the number that governs how intensely a site can be developed.

The City could look at reducing the cumulative amount of fees that it charges developers, which add up to tens of thousands of dollars a unit. Again, this seems unlikely, given that they added extra fees for Parks last year, and this year are likely to add fees of around $32-38 to access bonus FAR (which is currently cheap or even free).

Beyond that, I don’t know. It might even be that the local construction industry is running at maximum capacity.

chris
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chris

Anecdotally, I’ve read that two of the three new apartments at Hassalo on 8th in the Lloyd District have only rented about 35 percent of their units. Most of these new buildings have a ton of vacancies. I wonder if we have already overbuilt, and if it just takes time for prices to adjust.

soren
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soren

Pick your poison.

In general, single family residences waste energy, waste urban land, and enormously encourage consumption (2500 square feet of room for “stuff”). IMO, equating an energy efficient small apartment with inner Portland’s $700,000 bungalows is the epitome of false equivalence.

Hello, Kitty
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Hello, Kitty

“One of two things is going to happen…”

Actually, there are lots of possible courses of action. Build out other urban centers, for example, and expand the bikeable cores around them. There are only two options if two are required to fit your agenda.

Hello, Kitty
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Hello, Kitty

What if those jobs were focused around a new urban core at Gateway (that the city is trying to build), rather than spread out through the hellish sprawl that is Kruse Way?

eddie
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eddie

Unfortunately no matter where the jobs are, most people are gonna drive to work. And as time goes by more and more cars are going to arrive in Portland, and it’s up to us to do the damage control. Sad truth. I don’t see any evidence to the contrary.

I think once you start talking about Gateway or Kruse Way or Hillsboro you just aren’t talking about Portland anymore. The original charm just doesn’t exist in those places. Especially if you don’t drive or want to bike for an hour just to get to an interesting part of town.

There are reasons the central part of cities are the most popular. They’ll have the oldest businesses, the most interesting architecture, the museums, the concert halls, the tradition and the history, the real flavor of the place. It’s where the rivers are going to be, the best parks, the features that make the place what it is.

I think people are going to seek out other cities before they consider living in the somewhat less interesting outskirts of Portland, and in fact I know plenty who have opted to have a higher standard of living closer to the city centers of St. Louis, Houston, Pittsburgh, etc.

I hope the outskirts develop their own cultural centers with jobs and low rents and bike friendly infrastructure, but I sort of doubt it. I think people will opt to live elsewhere instead. We’ll see…

Doug Klotz
Subscriber

And Maccoinnich has summed up the fallacy we continually hear of “why don’t we just develop Gateway into a nice Center”. It’s a partial grid, backing up to shopping center and a freeway off-ramp. There are few endearing qualities to attract jobs or residential construction, at least in Portland in 2106. PDC and others have tried to jumpstart Gateway “for decades”, in the words of one Portland planner, and it hasn’t worked.

Lents is a more likely prospect, with pretty good transit access, even though it, too, is up against a freeway, and thus for practical purposes, constrained to grow in only one direction. But it’s mode split will, I would guess, still be worse than inner SE.

I believe one element of inner SE (50th west) achieving a better mode split is that it has good transit, and also the ride is short. But, beyond transit, it is close enough for a 20-minute bike ride to downtown. And, at least up to 20th, there’s a good chance people will even walk to downtown or certainly to Central Eastside jobs.

Eddie’s points are well taken as well. I do think there’s hope for Foster Road, Montavilla, North Tabor and maybe even Lents. But beyond that it’s difficult to raise enthusiasm, among employers or housing builders.

Robert Liberty
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Robert Liberty

I am amazed that 40 years on, people still don’t understand that Oregon’s laws required there to be a 15-20 year supply of land inside urban growth boundaries for housing, jobs and other urban needs. Visit Metro’s website and you can see a map of all the vacant land inside the UGB. Prices are rising fastest, where there is demand, and that is in the inner city neighborhoods that have the qualities more and more people want. In addition, local governments, like Washington County, have difficulty find the money (i.e. money from their taxpayers) to pay for the new arterial roads, schools, parks, water and sewer lines, etc., required for new development at the edge of the urban area. Assume the UGB was expanded enough to reduce (raw) land costs; in a tight market what makes you think that a developer or home builder will automatically pass along their cost savings to the purchasers? Do you really think a home builder is going to tear up a check for $350,000 for a home and say, “No that’s too much. I saved $15,000 on my land costs because the UGB was expanded so now I will charge you just $335,000 for your new home.”