New Apartments Designed To Help Shrinking Middle Class

By Oliver Spencer | November 18, 2017

Bucking the luxury housing trend, $500M in new apartments designed to help Seattle’s shrinking middle class

By

Mike Rosenberg
Seattle Times business reporter
Two Seattle firms are putting $500 million into building “workforce apartments” rather than the luxury units now sprouting all over. Spectrum Development and Laird Norton Properties will focus on areas like First Hill and Pioneer Square where rents are becoming out of reach.

Seattle’s record apartment construction boom almost exclusively has produced luxury buildings — the kind with $2,000 rents accompanied by concierge services, high-end appliances and yoga rooms. That’s left a huge void for middle-class renters looking for regular housing.

Now two Seattle companies are making plans to put $500 million into building new apartments aimed at firefighters, teachers and other midlevel workers.

And they’ll focus the development in urban areas where people want to live but rents are becoming out of reach: in neighborhoods near transit, schools and shops, in places like First Hill and Pioneer Square.

The initial projects are just being planned now, and the first units are scheduled to open in 2019, with others likely to debut over the following five years at various locations.

As part of the deal, Laird Norton will leverage up to $150 million of its own money to borrow additional funds. The partners also plan to save on big land costs by giving property owners a partial stake in their projects. Spectrum has completed more than a dozen urban projects like the rebuilt Publix Hotel and apartments over its nine years in Seattle. Laird Norton, which traces its roots back to partners in the original Weyerhaeuser timber operation, is venturing into development for the first time but owns hundreds of completed buildings across the country.

Spectrum and Laird Norton insist their plans make good business sense, but say their main motivation is to help ensure the middle class won’t be pushed out of Seattle any further.

Already, just this decade, the number of people living in the city who make above $75,000 has grown 11 times faster than those making less than that — partially because those with lower pay are moving out to somewhere cheaper.

“Where are our teachers and health-care professionals going to live in this city?” said Jake McKinstry, a principal at Spectrum. “We want the people who contribute so much to be able to live here.”

The need is huge: About 92 percent of the 31,000 new market-rate apartments that have opened in Seattle this decade have been luxury units, with an average rent  just under $2,000 a month, according to the rental firm RealPage.

Only 2,400 workforce housing units have been built this decade in Seattle. Those apartments have rents that average about $1,300 a month, RealPage found.

Spectrum and Laird Norton estimate their rents will be somewhere in between.

Two workforce apartment buildings built by Spectrum last year in First Hill included one-bedrooms ranging from $1,200 to $1,800, depending on the size. The typical new luxury-building unit in that neighborhood averages $2,000 a month, though across all types of apartments, the average is $1,650.

At the first building planned by the partnership — the 80-unit Canton Lofts at Third Avenue South and South Washington Street, at Pioneer Square — a new loft (basically a two-story studio) will be aimed at people making the median income. Rent starting in summer 2019 will be $1,600 — also cheaper than the average new building there, but pricier than most old buildings.

At those rents, someone earning the city’s median income would spend about 30 percent of their pay on rent, which is the standard recommended limit nationally to be considered affordable. Many renters wind up paying a higher percentage of their income on rent, eating into other costs like health care.

And they hope to arrange deals with property owners to save on upfront costs, since buying properties for development can cost tens of millions of dollars.

At the Canton Lofts, landowners and philanthropists John and Shari Behnke contributed the property in exchange for being long-term co-owners in the project. The developers also sweetened the deal for the landowners, who have donated to the arts in the past, by deciding to lease a small retail space in the project to the local nonprofit Path with Art.

Jeff Vincent, CEO of Laird Norton Properties, said the business case for investing in this type of housing hinges on long-term returns, which they expect to be 6 to 8 percent.

While many developers sell their buildings quickly after opening, Vincent said the partners see workforce housing as a slow, steady profit maker.

That’s still a contrarian view. The banks and investors that generally finance apartment construction remain focused on the luxury buildings that have proved to be good moneymakers in recent years.

McKinstry said that before connecting with Laird Norton, his firm had trouble finding a willing partner with the money to allow Spectrum to embark on its workforce housing plan.

Some neighborhoods, like South Lake Union, already have land costs so high that Spectrum and Laird Norton say they’ll be off-limits for their purposes.

Peter Orser, a former homebuilder who is now chair of the University of Washington’s Runstad Center for Real Estate Studies, said building new housing for middle-class people is very difficult in a place like Seattle, where land and construction costs are so high. But if developers are able to meet the conditions laid out by Spectrum and Laird Norton — like small buildings with no underground parking or luxury perks, and landowners and borrowers willing to take smaller initial profits — then it could work.

“If you can do all those things, I think you got a shot at being able to keep your rents lower,” Orser said. “I think they might be on to something.”

“If it was easy (to build workforce housing), people would be doing it,” Orser said. “Because, frankly, the risk is lower — there are many more renters making 100 percent of the median income than 200 percent. At some point you’re going to run out of people making $123,000.”

Greg Willet, RealPage’s chief economist, concurs: “I certainly would expect a bulk of development to remain focused on that luxury product.”

How other developers react to the deal is important because the 1,000 units planned in the joint venture, while significant, won’t alter the apartment boom on its own.

The city is on track to get as many as 60,000 new apartments this decade, more than in the previous 50 years combined. But about one-third of those units haven’t been built yet, meaning developers still have time to decide how fancy they want their buildings to be.

“We would like others to join us and expand beyond the $500 million,” Vincent said. “Why can’t the industry and private landowners turn this into a billion-dollar initiative to develop workforce housing?”

“We think there’s a big part of our population that can’t afford luxury,” Ferris said. “It’s something our community really needs. Otherwise, they’re getting pushed out.”

Grant added: “We’re really committed to this area, civically. We all have deep roots here.”

Vincent said he signed on in part because of what he saw in a past professional life in Chicago, where some neighborhoods grew expensive and homogeneous. He said he didn’t want to see gentrification take hold here any more than it already has.

The joint venture may also look at building student housing as part of its plans, another big need locally that universities have struggled to keep up with.

Vincent noted the student housing is particularly important because so many of the new, high-paying jobs here require four-year degrees, but not everyone can afford the expenses of getting one. As a result, he said, the region imports a lot of its tech talent, from places like California and overseas.

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