Closing the Investment Return Gap in Seattle
Due to skyrocketing housing prices in and around the city, many nurses, school teachers and first responders drive an hour to their jobs. What can be done to make building workforce housing more enticing?
Construction workers building new market-rate housing units in Seattle area neighborhoods typically drive 45 minutes to an hour to get to their jobs because they can’t afford to live in the very buildings they are helping build. Unfortunately, the demand for workforce housing (defined as people making between $40,000 and $64,000) in the region will not be alleviated by the recent flattening of rental rates and the decline in sales prices for homes in the region. Prior to its recent pledge of $500 Million to help address the region’s housing crisis, Microsoft studied local housing and labor data and concluded 305,000 workforce-housing units are needed to fill the region’s affordable housing gap.
A comparison of market rate vs. workforce rental units helps explain the need and why a softening market cannot catch up to the widening gap between incomes and affordable housing. Monthly rent for a mid-range two-bedroom unit within market-rate housing developments in Seattle is typically $2,800 to $4,500/month. Based on data from the Seattle Office of Housing, affordable rent for a workforce two-bedroom unit would be $1,350 to $1,800/month. Other than a Seattle real estate tax exemption program that only applies to 20 percent of the units, however, there are no subsidy sources to support the reduced revenue stream, so real estate developers usually choose not to build these units, which have substantially the same construction costs as market-rate units.
Achieving the Threshold
Kristin Ryan, principal at Barrientos Ryan, whose team has developed over 4,000 market-rate and affordable housing units, notes that developers of workforce housing who need institutional financing must show a credible anticipated return on investment that hits certain thresholds. These thresholds can best be achieved by the strategic use of tax credits and other incentive programs. Developers of housing units in the Seattle region currently expect a 12-15 percent return on investment. The combination of real estate tax exemptions, historic tax credits, and recently enacted Opportunity Zone tax incentives could bring the long-term return on workforce housing investment closer to the expected returns for market-rate housing.
Using these tax programs, and with the support of community-minded investors, Barrientos Ryan is redeveloping the historic Louisa Hotel in Seattle’s Chinatown/International District into workforce housing units. Anticipating completion in May of 2019, this project could open the door to similar developments much closer to downtown Seattle and regional transportation hubs, which will also help alleviate increasing gridlock on our roads and freeways. Such developments will help re-create a community where the people who have some of the most important jobs in the Region—nurses, school teachers, first responders and construction workers—don’t have to drive an hour to get to those jobs.
Jeffrey Frank is the managing shareholder of Buchalter’s Seattle office and a member of the firm’s Real Estate and Litigation Practice Groups.