The focus of Seattle Commercial Real Estate is on commercial real estate. However, with higher interest rates and the high costs of materials and labor in Washington State, it is worth noting significant changes that will impact housing development going forward. This past legislative session in the State has the potential to impact investment decisions. The first significant item was the imposition of rent controls.
Historically, rent control leads to a limitation of construction. More importantly, if a property is not properly maintained and rent increases are not adequate to maintain the asset, then it inevitably leads to a cycle of property degradation. We are aware of rent-controlled properties in California where tenants consistently make significant profits by subleasing, as the landlord is tied to a rent that does not reflect the actual market value. The good news is that increases seem reasonable after one year, but eventually, through the inevitable boom and busts of the real estate cycle, this may not hold true.
The demand is for subsidized (low-rent) and affordable housing. The problem is when government and non-profits get involved, the costs of regulations and underwriting impose cost burdens commonly not associated with private for-profit development. A case in North Seattle was a highly touted “Affordable” project done several years ago, and the unit cost was “only” $435,000. A similar market-rate project was built in the same area at the same time for only $350,000 a unit.
The rent controls were also imposed on mobile home parks with limitations on rent. The good news is that new projects can be rented at the then-current fair market rents. It is going forward that issues may eventually arise.
In the Single Family market, the wisdom of the State Legislature now allows single-family lots to be subdivided and it will enable development of up to four units on a formerly single-family lot. With a shortage of single-family land, long lead times to development, and a huge demand for housing, the market for housing is roaring.
Seattle Commercial does not generally look to the single-family market. We look for four units or more in multi-family, but the fact of the matter is, going forward, if we find a unique opportunity, we will recommend it to our clients. How long this opportunity lasts is a matter of conjecture.
