It Started With Mike O’Brien: Rent Control for Commercial Space a Bad Idea

Let me start this post out by saying that I agree with more in Councilmember Sawant’s proposal for small business that she unveiled yesterday at City Hall. There is lots to talk about when it comes to improving small business in Seattle. But what Councilmember Sawant and her campaign don’t know or forgot is that many if not most property owners who rent commercial spaces are small or medium size businesses too. The part of her proposal that is most problematic is the one she led with: rent control for commercial rental space. I have doubts about the legality of such a move, but let’s face it, such a proposal just pits small business owner against small business owner rather than solving any problems. The best thing we could do, today, is undo the disastrous decision made by Councilmember Mike O’Brien several years ago to cave to angry neighbors and not allow retail commercial space in the low-rise zones.

My annoyance and disagreement with Councilmember Mike O’Brien started long before Smart Growth Seattle ever existed. Back in 2011, Councilmember O’Brien fell into what I called the Sustainability Gap, the gulf between what elected officials say about sustainable policy and what they actually do. He did that by inexplicably voting against legislation that would have allowed small, retail commercial spaces in the low-rise zones in neighborhoods like Capitol Hill. Yesterday’s political show by Councilmember Sawant was all about the loss of small commercial spaces for smaller business. Everything, she argued, has become huge corporate floor plates with huge chains.

Notwithstanding Councilmember Sawants hyperbole, she has a point about smaller spaces. Smaller square footage is important for smaller start up business because it’s cheaper — the same reason microhousing is important for many people who want to live in great, dense, transit friendly businesses and are willing to pay less for less space. Councilmember O’Brien’s decision to side with NIMBYs who were worried about topless barbershops, means that there is less supply of just those kinds of spaces. O’Brien seems bent on creating a crisis wherever he goes so he can intervene and save the day.

So while I agree that we need greater supply of small office space, rent control won’t make that happen: it will make the situation worse. And it would certainly, I hope, be challenged successfully in the courts if the City Council is cowed by Councilmember Sawant into passing commercial rent control. It’s a bad idea whether it’s legal or not, but I have doubts that even though current State law is silent on commercial rent control that it couldn’t be challenged on other grounds. Commercial land lords better hope there is some legal handle to hang onto here.

But even worse that the terrible idea of commercial rent control which would have the same effect as residential rent control, scarcity, higher prices, and disincentives to maintain and improve existing space, is that it is needlessly divisive. Right after Councilmember Sawant’s political show broke up, I talked with Davie Meinert a long time civic activist, business owner, and gad fly for good policy who is supporting her scheme. We found ourselves agreeing on almost everything except commercial rent control. Here’s the other elements of Sawant’s proposal:

• • Portable Retirement Accounts for Workers in Small Businesses
  • Expand Late Night Public Transit
  • Expansion of Social Service Outreach for the Homeless, People with Mental Illnesses and Addictions
  • Municipal Bank & Low-Interest Loans

Now I don’t know a lot about each of these other than the last one which I generally support. As for the others, they are things that I’d love to see happen if they didn’t come at the expense of killing off small businesses in the process by adding costs, fees, rules, regulations, and taxes. Meinert also seemed in agreement that we should find ways to incentivize saving smaller spaces.

I said, “let’s do that math on that.” I just think if we got smaller businesses together with builders, developers, and property owners some good ideas could be worked out. But commercial rent control just shrinks the pie by making it harder to do what the renters want in the first place, more small spaces. We’ve got to do better and figuring out how to expand the pie, not fighting over the last piece.

And Councilmember O’Brien’s role in this demonstrates why bad ideas and seemingly small bad decisions add up and hurt everyone. The chickens are coming home to roost, and thanks to Councilmember O’Brien’s bad vote years ago, they aren’t finding any place to lay their eggs.

Forbes:Mandates Mean Higher Prices for Housing 

I’ve been busy enough lately that I missed my usual 6:30 post. So I’m going to cheat a bit. A year ago I wrote a post at Forbes that I think is just as relevant today as it was then. Too many rules, regulation, and process means more expensive housing. That’s why mandatory inclusionary zoning won’t work, no matter how much we dress it up. And rules hurt non-profits too.

It isn’t surprising to hear these concerns from for-profit developers. For years, builders of market rate housing have complained that too much process, too many rules, and too many parking spaces drive up costs and therefore, rents. But it turns out that both non-profit and for-profit projects are made more expensive by these too much process and too many rules.

Local policy makers and activists want it both ways; punitive measures against greedy capitalists and affordable housing. You can’t have both.

Everyone? Letter Ignores Some Key Questions

Branding itself as Seattle for Everyone, a coalition of various supporters of the so-called “Grand Bargain” sent a very interesting letter to Councilmember Mike O’Brien. The Grand Bargain, you’ll remember, is an agreement that was struck between some developers, non-profits, and the City to impose mandatory inclusion of rent restricted housing in all new housing built in the city in exchange for some additional development capacity. Unlike other schemes developed by City Hall, the Bargain is mandatory: builders must create the rent-restricted units whether they want or need the additional development capacity. The letter touts the diverse supporters of the Bargain over whether it will actually work, practically, politically, or legally. Mostly it will raise housing prices, exactly what we’re supposed to be fighting.

The letter relies heavily on the unusual nature of the groups and people supporting the bargain.

We are writing on behalf of a broad coalition of affordable housing developers and advocates, for-profit developers and businesses, labor and social justice advocates, environmentalists and urbanists, united together to build an equitable, prosperous, thriving, and inclusive Seattle by ensuring that the benefits of the city’s growth are shared by all current and future residents – from those struggling with homelessness to wage-earners and families. Under the banner Seattle for Everyone, we urge your strong support for the Housing Affordability and Livability Agenda (HALA) and the “Grand Bargain” provisions to produce and preserve critically needed affordable and market-rate housing in the City of Seattle.

Sure. The group of signatories spans the affiliations the text of the letter claims. But will the Bargain work? It’s hard to say whether, as the letter states, “The proposal is a smart balance of developer requirements and additional building capacity.” I’ve pointed out that our measures of the problem, often called a crisis, are at best broad and clumsy and at worst down right wrong. Apartment prices are cooling off and the measure of affordability we use assumes that if everyone in Seattle paid exactly 30 percent of their gross monthly income for housing, we’d have no problem at all. As a person at 50 percent of Area Median Income (AMI) struggling to make rent that is 25 percent of their monthly income whether their life is “affordable.” Ask a couple earing 120 percent of AMI living modestly to save money and paying 20 percent of their income whether they should give up their apartment for someone earning less.

And remember that every additional floor or square foot comes at a cost to a builder. Even if I give a producer of housing more capacity it adds costs to the project. So will the rent restrictions imposed by the Bargain. It’s still unclear, especially in the low rise zones, and how this will meet the basic standards set in State law that any program of inclusion creates a fair exchange of value. If the costs associated with the extra floor and rent restrictions in Low Rise 3 zones, for example, exceed the value created by the upzone there is clearly a fairness problem. I’ll say more on that later. But in the end the only way to make up for the additional costs of the Grand Bargain is to raise rents to pay for the those costs, something completely antithetical to the intention of the signers of the letter (I think).

And politically? The letter says this:

Collectively, these recommendations represent a sea-change in affordable housing politics in Seattle. Now, a new alliance forged by common interests and shared objectives has put forth HALA and the Grand Bargain. We are excited to continue this game-changing alliance to build a diverse, equitable, and prosperous Seattle where the benefits of growth are shared by all. It is only fitting then that we have chosen to name our effort “Seattle for Everyone.”

The problem is that there are some critical groups and people missing from the bottom of the letter: NIMBYs. Across Seattle over the last 5 years, angry single-family neighbors have been tirelessly organizing against small-lot single-family infill development, microhousing, new housing in low-rise zones, parking exemptions, and for impact fees, linkage, more and more design review, and rent control. Why would these same people suddenly shift their resistance to growth and their political agitation simply because a few dozen groups and people signed a letter.

The letter asks Councilmember O’Brien “to minimize changes that would pit one faction against another, leading to more uncertainty, wasteful delay, less affordability and less housing supply.” But Councilmembers have already stated clearly their intent to hold hearings in every single neighborhood to get comments and approval from these same angry neighbors. Looks like Seattle for Everyone needs to gather a few hundred signatures. They could start by seeing who signed the various petitions against growth and housing that have been sent to Council.

And legally? As I pointed out, mandatory programs to require affordable housing in exchange for upzones are legal. But the legal standard in RCW 82.02.020 requires that there be a fair exchange of value that offsets costs. Legislation clarifying this passed (HB 2984) almost a decade ago and informs policies around the region. A paper outlining the laws and policies states,

One safeguard that is conspicuously missing from HB 2984, however, is any requirement to demonstrate that an incentive package will fully offset the cost of including affordable units. If the incentives do not cover costs of the affordable units, one of the two key criteria for a successful program will suffer. In a voluntary program, effectiveness will suffer, since few developers will undertake a program that costs them money (as seems to be the case currently with the many underused programs in the state). In a mandatory situation, fairness will suffer, since developers will be compelled to pay more in costs then they get back in incentives, thereby leading developers and their market-rate customers to subsidize the affordable units.

That last point about mandatory programs could provoke a swarm of law suits from smaller builders in the city who see the value created by the extra square footage in Grand Bargain upzones consumed by costs of construction, other regulatory requirements, and lost rent revenue. At some point rent increases in unrestricted units won’t pencil anymore to offset this loss and the project will be infeasible. And wasn’t the point of the Grand Bargain to lower housing prices, not raise them on every other unit not part of the inclusion? Worse, the provision of the Bargain could discourage new housing production meaning less market rate and affordable units.

Nobody likes to be a Negative Nancy or Cassandra or Norman Stansfield. And yes, lots of interesting and ideologically diverse people signed a letter. But a letter doesn’t make housing more affordable. Neither do schemes that add costs to housing. What makes housing more affordable are fewer costs and more supply. That’s why we’re skeptical of the Grand Bargain no matter how many names are at the bottom of a letter.

More Perspective on Displacement and Demolition

Yesterday I wrote about some misconstrued housing unit demolition data and how Knute Berger used the data to make the usual case about Seattle’s growth paving over our status quo paradise. I called Berger out on Facebook. But rather than retrench and defend, Berger took the high road and explained the data and the graphic was bad. Berger also took my comments to heart.

Roger Valdez, a strong advocate for more development, has criticized me—and my story—for fanning a sense of panic among people, that the city is being bulldozed. In a Facebook comment, he suggested that I follow up this way: “Yes, our city is changing and using qualitative measures it sure might feel like a crisis. But the numbers don’t bear that out. It’d be great if you’d do another post pointing out what you think this dissonance be between the data and the felt experience.”

Great idea.

I’ll explore that in future posts.

A great example of why Berger is so highly regarded as a writer and journalist.  Like Emmett Watson with whom he’s often compared, he’s really achieved legend status and has built a legacy around the history and zeitgeist of our city. In a debate that features so much name calling and emotional meltdowns, Berger did what I’d hope our City Council would do: check the emotion against the facts. It’s part of what I hope can become the Seattle Way.

 

 

 

Demolishing the Displacement Narrative

So it’s about as wonky as it can get. A dispute over how many housing units have been demolished in Seattle and what it means has lead to some very interesting back and forth on the internet this last week. Here’s the best summary of what went down from Ethan Phelps-Goodman. There isn’t an explosion of demolitions.

The erroneous analysis started in Schema Design’s ARCADE magazine, which ran a story and accompanying graphics showing the number of demolition permits per year growing from a mere 14 in 2005 to an expected 875 in 2015. Knute Berger followed up with a column in Seattle Magazine that cited the ARCADE piece and a supposed 8-fold increase in demolitions. In reality, demolitions are down from their previous peak in 2007 and 2008 and roughly in line with long-term trends.

Schema’s mistake? They draw their 10 year analysis from a dataset titled “Building Permits issued in the past five years”. When they plot this data, it’s no surprise that 2010-2015 looks dramatically different from 2005-2009, a period that isn’t included in their source data. The data does contain a few holdovers from previous years, making the resulting graph look plausible if you’re already inclined to believe the article’s conclusions.

 

So what? Well, the problem with the data is obvious. Schema just picked a piece of data then said demolitions are “skyrocketing.” That’s the obvious data goof. But Berger’s piece was a typical paean about how “things ain’t what they used to be around here.” That’s the narrative the data was use to support, “runaway” growth is ruining this town!

We’ve covered this ground before. It’s a stubborn canard. So stubborn in fact that John Fox has built an entire organization around the idea that hundreds of affordable housing units are being demolished all over town to make way for luxurious apartments for nouveau riche techies with lots of money to spend. This simply isn’t true. In fact here’s a chart that by internet standards is ancient — from all the way back in 2014.

I think we did a version of this that changed the term “lost” to something else. Lost is a bit dramatic. I wrote about this in a post called, “Out With (a few) of the Old, In With (a lot) of the New.” So it’s funny that this dispute flared up again. It’s as if, well, people think that greedy developers are squashing out the soul of Seattle with all the new building. Poor people are being “priced out” of their affordable units, and those units are being renovated or demolished to make way for, you guessed it, those young, newly rich kids from Amazon.

Great story, but none of it is true. In fact, every time we’ve demolished a unit over the past decade or so, we’ve replaced it with 8 new units. And that one unit wiped out was not a subsidized unit. Why? Because subsidized units are generally covenanted for decades by legal agreements with Federal, State, and sometimes local governments that put up the money. Some number of those units demolished were from tired old housing stock that was not using land to full capacity. The featured image above is a good example. An old worn out 12 unit building on Thomas and Broadway is going to be “lost” to probably 80 units of new housing.

The story woven by writers like Berger is so ingrained that slapping some charts and graphs doesn’t usually illicit much interest. Berger could have gotten just as many nods and harumphs of satisfaction had he dispensed with the quantitative antics. Not necessary. We’re in a housing crisis after all! Caused by all those jobs and we’re seeing everything we know and love demolished to make way for ugly apartments for rich people.

Except that just isn’t happening.

What is happening is that we’re struggling to keep up with housing demand, which is pitting renter against renter in the market competing for scarce units instead of landlord competing against landlord for tenants. But that just sounds complicated and there’s no villain in that story unless you consider angry neighbors fighting new housing villains. The City Council just calls them “voters.”