Seattle’s Mandatory Housing Affordability Program Is on Course So Far

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Apartments rise in Greenwood. Thanks to MHA, the project is six stories instead of four and will contribute to affordable housing production. (Photo by Doug Trumm)

Last week the Mandatory Housing Affordability (MHA) program celebrated two years of being in effect in all multifamily areas of the city. The data thus far suggests the program is largely working as intended and on pace to hit its goal of producing at least 6,000 affordable homes in a decade.

The Seattle Office of Housing (OH) dropped a bevy of annual reports earlier this month among them was a report on MHA production.

In March 2019, the City Council passed MHA rezones in 27 urban villages across the city and Mayor Jenny Durkan signed the legislation into law. The Council passed an earlier wave of MHA rezones in the University District, Downtown, South Lake Union, Uptown, and the Central District over the course of 2017, which triggered the inclusionary zoning program sooner in those neighborhoods. However, the “citywide” program was delayed a year and a half by a series of appeals from a coalition of homeowner groups dubbed the Seattle Coalition for Affordability, Livability, and Equity (SCALE). The MHA rezones touched only 6% of single family zones, leaving roughly 75% of residential land still set aside for single family homes — albeit with an accessory dwelling unit (ADU) or two.

The rezones typically added one or two stories of building height in exchange for affordability requirements ranging from 5% to 7% of homes in “M” zones and up to 7% to 11% in the highest intensity “M2” zones where the increases in building heights and allowed densities are much more pronounced. Developers can also pay an opt-out fee calibrated to create an equal or greater amount of housing than the percentage requirement, but at another site. Those in-lieu fees go into the City’s affordable housing trust fund and the Office of Housing adds them to its annual housing investment awards.

Mayor Jenny Durkan displays the signed MHA rezone bill to an enthusiastic crowd of supporters at Capitol Hill Housing. (Photo by Natalie Bicknell)

Thus far, developers have overwhelmingly chosen the in-lieu fee option rather than performing on-site, with only 104 units on-site so far. The influx in MHA revenues is helping the Office of Housing to ramp up its annual awards, which in turn pushed affordable housing builders to boost production, too.

In 2020, MHA fees contributed $52.3 million of Seattle OH’s record award of $115.9 million in annual housing investments. The previous high was $110 million in 2019. All together “1,286 new affordable rental apartments will be produced through those awards,” the City said. Based on the funding ratio, 580 of those apartments should be credited to MHA. OH’s other major funding source at $56.7 million in 2020 was the Seattle Housing Levy, which voters approved in 2016 and is due for renewal in 2023.

Seattle’s pace of affordable housing production is ramping up. The City expects more than 2,000 rent-restricted homes to come on line in 2022. (Credit: Seattle Office of Housing)

The OH is expecting the pace of production to only increase and is projecting 4,600 affordable apartment units will be completed between 2021 and 2023.

“Through investments over the past 39 years, Seattle now has over 19,000 City-funded rental housing units in operation (14,400) or under development (4,700). In addition, over 1,050 homebuyers have purchased their first home with an affordable City-funded loan and 300 permanently affordable homes are in service or under development with City assistance. Approximately 2,400 new City-funded affordable units opened to new low-income renters between 2017 and the end of 2020 – with 825 of those units commencing lease-up in 2020 alone,” Seattle Office of Housing said in its Annual Investments Report.

Housing production holding steady

Kevin Schofield of SCC Insight analyzed permitting data from the Seattle Department of Construction and Inspections (SDCI) last week and found housing production was holding steady. “MHA seems to have made no significant impact on multifamily housing development in Seattle,” he wrote. “Of course, nothing else has either: since mid-2019 both the number and size of the multifamily projects being applied for has grown, but neither is reflected in the permits being issued.”

Seattle produced 8,519 new homes in 2020, down from a record high 11,182 in 2019, but still respectable. The City has issued permits for an additional 22,946 homes, suggesting a solid pipeline. (Credit: City of Seattle)

While in some cases developers did appear to race to get their projects vested under pre-MHA zoning to avoid contributing fees or affordable units, overall that phenomenon wasn’t strong enough to lead to a significant slackening of overall housing production in the wake of MHA. Given the development cycle, 2019 may already have been queued up to be a big year, but developers racing to beat MHA requirements may have helped push the total up to 11,182 homes produced.

Portland’s multifamily housing permitting peaked in 2017, with 5,767 units, and cratered in 2020. (Credit: ECON Northwest)

In contrast, Portland observed a big building blitz ahead of its inclusionary zoning ordinance followed by a sharp dip in permitting that lead to critics assailing the program as the culprit. Cities should be open to fine tuning the program, especially if it’s clearly obstructing development. Portland is seeing a metro-wide construction slowdown; thus, inclusionary zoning may not necessarily be the primary drag on production since surrounding suburbs didn’t pass a program. Portland’s regional slowdown could mean that the race to beat inclusionary zoning requirements may take longer to absorb than in the hotter markets like Seattle. Developers have also complained about the rent stabilization program that the Oregon state legislature passed. New rentals are exempt from rent controls for their first 15 years, which suggests a capital strike may be at play rather than pure economics. Moreover, part of Portland’s issue seems to be that their inclusionary zoning program exempts projects of 20 units or fewer, which has encouraged developers to just build smaller projects, even bundled together as shown below.

Northbound 30 includes 145 homes in all, arranged in small buildings under 20 units. (Jones Architecture and Waechter Architecture, via Next Portland)

Seattle’s program exempts single family zones, but every project benefitting from an MHA rezone triggers the affordability requirement. If Portland continues to see development gravitating toward projects under 20 units, they may want to rethink their design.

MHA payments picked up significantly in 2020, the first full year of implementation. The City has collected $96.1 million in MHA payments to date, according to Seattle OH. (Credit: SCC Insight)

Overall, multifamily permitting activity is down 66% in Portland city limits and down 42% in Seattle, according to ECON Northwest’s analysis of HUD data. Even in fast-growing Salt Lake City, which doesn’t have an inclusionary zoning program (but is considering enacting one) permitting activity is down 26%, while Denver is down 22%. On the other hand, Sacramento (+89%), Austin (+52%), and Nashville (+34%) are cities where permitting activity is picking up, ECON Northwest reports.

Dip in office development

Schofield highlighted that commercial permitting activity had plummeted after a banner year in 2017. This is negatively affecting both MHA contributions and City revenue overall, since sales tax and real estate excise tax are major revenue sources in a city lacking an income tax or capital gains tax.

“Between 2016 and 2020, the annual count of new construction permits was fairly consistently between 260 and 350; however, the total value of those permits dropped dramatically starting in 2019: from over $3 billion in 2017 to under $700 million in 2019 and 2020.”

Rainier Square tower climbs upward in September 2019. (Photo by Doug Trumm)

The per square foot MHA fees for office development are lower than for residential. Still, plenty of large office projects slipped their permits in and vested before MHA went in effect. The biggest of the bunch was the 58-story Rainier Square, which is just now coming online with 720,000 square feet of Grade A office space, plus high-end hotel rooms and apartments. The 44-story F5 Tower opened in May 2017, and 38-story 2+U Tower (now christened Qualtrics Tower after its anchor tenant) opened in late 2019, each adding a similar amount of office space. Plus, Amazon’s 38-story “re:Invent” tower opened in 2019 with 1.1 million square feet.

Amazon is the largest employer in Seattle, with about 50,000 of 75,000 employees in the Seattle region based in the center city. However, Amazon has said it will focus regional office jobs in Bellevue going forward, partially as a rebuke of Seattle for passing a payroll tax hitting them and not being grateful enough or electing its preferred City Council candidates. Amazon adding more jobs in Bellevue rather Seattle is another reason why permitting is slowing west of Lake Washington. However, it may be a bit of a moot point on housing growth long-term, particularly once East Link light rail opens in 2023, because workers may choose to commute to Bellevue from elsewhere since the Clay City’s housing market is even pricier than Seattle’s and affordability efforts haven’t been very aggressive.

Slowdown in townhome development

While Seattle’s housing production is hanging in there, some sectors are lagging and a long drought in permitting activity could dry up the pipeline and cause prices to shoot back up and displacement pressure to jump. Townhome permitting activity has dropped recently, and developers like Marco Lowe have pointed to MHA as the drag here. Rents are down in Seattle during the pandemic, but the market for single family homes is incredibly hot, which is linked to people wanting to upgrade for more space while they’re working from home. Townhomes and small co-op or condo buildings could help ease this market pressure, which is why the drop in activity is a little surprising.

Lowe works for the Master Builders Association of King and Snohomish counties (MBAKS) and is also a developer of small apartment buildings himself. I toured Lowe’s Beacon Hill small efficiency project last month and talked to him about his experiences as a developer and will follow up soon with an article based on what he and other builders are saying is happening to their projects in low-rise zones.

Potential fixes include streamlining permitting and design approvals for smaller projects to decrease risk for developers, reforming single family zoning to allow townhome projects all across the city, boosting the density bonus, and/or payment plans for smaller projects so they don’t need to pay MHA fees upfront.

On the whole, MHA is allowing Seattle to pick up the pace of social housing production closer to where it needs to be, which is welcome news. This bump shouldn’t lead us to get complacent. We could improve our housing outlook further by taking MHA truly citywide, investing more in social housing, jettisoning predatory delay mechanisms, and fine tuning the program if certain zones continue to see little to no development after the economy is humming along once more.

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Doug Trumm is The Urbanist's Executive Director. An Urbanist writer since 2015, he dreams of pedestrianizing streets, blanketing the city in bus lanes, and unleashing a mass timber building spree to end the affordable housing shortage and avert our coming climate catastrophe. He graduated from the Evans School of Public Policy and Governance at the University of Washington. He lives in East Fremont and loves to explore the city on his bike.

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JonUrsin

I believe the city should ditch the MHA fee and apply it to SFZ’ed homes instead. This would put the burden of building affordable housing on those who are squandering the most resources (land).

spark

Since the area in Seattle where townhouses can be built is very limited, I’m curious if there is any way to analyze how “full” are the zones that currently allow townhomes to be built.

I live in a townhome in central Ballard and anecdotally it seems like _almost_ all of the dilapidated SF homes and surface parking lots have already been town down and replaced with townhouses. The remaining homes that could be converted seem to mostly be in very good condition and owned by wealthier families that perhaps just prefer to live in a house in a walkable area, and don’t have any necessity for the proceeds they could get by selling to a developer (or developing themselves).

This might explain part of the slowdown. At least in Ballard it doesn’t seem like there is much more “low-hanging fruit” left to be converted to townhouses. The only way to get more would be to expand townhouses into the SF5000-zoned areas.

Eric

That’s a fair observation. The MHA program did upzone several areas to allow townhomes. On walks around the rezoned areas of Crown Hill and Wallingford I’ve noticed quite a few pending land use action signs for townhome projects. Still, no good reason to ban these on any residential lot in the city.

Bryan

Still, no good reason to ban these on any residential lot in the city.”

Agreed and to go even further every reason to legalize them:

In our part of Wallingford there’s a new set of 5 townhomes on a 5,000 square foot lot. They are selling in the 800s. Older smaller houses on the same street (literally next door, in one case) also sell in the 800s.

So right out of the gate we’re at +4 homes for the same price, plus whatever fees were paid.

Bigger fancier houses are all $1M+ – one next door to the townhomes Zillows fo $1.8M.

AJ M

When units are provided on site, the affordability requirement expires after a certain period of time, but the of site housing funded by the fees are generally permanently affordable, correct? Is the MHA funding all construction of new units, or does some of it go to preserving existing affordable units?

“since mid-2019 both the number and size of the multifamily projects being applied for has grown, but neither is reflected in the permits being issued.” Does that mean less projects are making it through the permitting process, or simply that the permit backlog is growing?

I think you make a good point on Portland’s lull likely impacting by the pull forward of projects to avoid the MHA fees, while Seattle’s project backlog is robust enough on the residential side to obscure the pull forward. Looking at the broader metro is also important; if Portland is having a regional slowdown then that strongly suggests inclusionary zoning isn’t an issue, but the shift of office production to Bellevue is noteworthy. If MHA causes some office production to shift other transit orient job centers like Bellevue & Tacoma’s downtown, that’s not a bad thing and I would perhaps argue that regionally it makes for good policy. On the other hand, if less transit accessible job centers like Renton’s waterfront or Bothell’s suburban biotech scene start to grow significantly, then I think there is a good policy discuss to be had if Seattle needs to adjust to pull that development back into Seattle.

Douglas Trumm

MHA on-site units must be set aside for 75 years. I think the fees are used to create new units, but I’m not sure if they’re banned from maintenance/preservation activities. Likely OH could use levy or REET funds for that.

It’s a combination of factors. The influx of activity to beat MHA did swamp SDCI and extend permitting times, and then the pandemic hit and disrupted the flow again. The virtual design review process got the ball rolling again, but the backlog that had accumulated was large. In other cases, it may be they hit snags of the predatory delay variety, like the Queen Anne Safeway project. Kevin had some good context on another factor affecting the permit backlog: developers are slow-walking their permits because it they get issued their construction permit too soon, they have to use it or lose it within a year:

“At a recent committee hearing, representatives of SDCI told the City Council that there is a bit of monkey business going on with permits: knowing that once a permit is issued the developer must begin the project within 12 months, some developers are stalling on completing the final required changes to their plans in order to push out the permit issue date. As the economy picks up again this year and financing becomes more available, we may see more of those permits issue — especially if the federal and state government come through with housing and infrastructure funding.” -SCC Insight

I agree with you that some office development going to other regional transit hubs like Bellevue shouldn’t be a huge worry to Seattle and could be a positive for balancing jobs across the region. Seattle has such a headstart it’s going to continue to be the CBD for the region for many decades to come even if Bellevue is able to sustain its growth, which seems like a huge if since their downtown, like Seattle’s, is getting close to built out and they don’t seem ready for large scale upzones politically.

AJ M

Interesting, and that makes good sense to me that private developers would slow walk permits given the extreme uncertainly this past year. Hopefully that uncertainly greatly diminishes soon.

75 years is longer than I thought. Is MFTE for a much short timeframe?

I agree Seattle will remain the primary CBD for a long time, and at the current pace Bellevue may indeed be built out within a decade. Similarly, Seattle’s downtown and the U-District could be built out within a decade if there is another development wave, so will be interesting to see if another urban center emerges in the region and whether that next center is driven more by policy or private action. The nexus between MHA and similar taxes/fees and private development decisions is both important and opaque.

RossB

If MHA causes some office production to shift other transit orient job centers like Bellevue & Tacoma’s downtown, that’s not a bad thing and I would perhaps argue that regionally it makes for good policy.

I would consider it a bad thing. Transit is much better in Seattle than in those areas. People are more likely to drive to work in those areas than Seattle. Similarly, development in those areas is far more likely to result in sprawl then in Seattle.

If, on the other hand, it pushes development to say, Vancouver BC (a city with better transit than Seattle) then it would be different thing. Or if it pushes development from places like you mentioned (Bothell) to downtown Bellevue, that would definitely be good. But regionally, from an environmental or transit standpoint, it is best if office development occurs in downtown Seattle.

AJ M

I disagree; I don’t think our goal should be Chicago, a large downtown with excellent transit surrounded by a much larger area with mediocre transit.  For the large majority of Chicagoland, transit is useful only to get in/out of Chicago, and the vast majority of residents and jobs in greater Chicago have poor access to all-day transit.   The same is true in Seattle; if Seattle doubled in size in 20 years, it would remain a minority of the population of King County, let alone the broader region.

We should aspire for Seattle’s neighbors to be like an Evanston or Milwaukee – a dense cities with good transit, albeit lower transit mode shares than downtown Chicago – rather than an auto-oriented Naperville or Schaumburg.

The value of growing a location like Bellevue is that if it creates the critical mass of density and transit infrastructure, not only incremental but current also trips will shift away from SOVs.   It’s the same logic on why Seattle is growing multiple urban villages and not just in the urban centers, even though outside of the urban core Seattle’s mode share is comparable to nearby suburbs.