The following appears in this months edition of Master Builder, a regular publication of the Master Builders Association of Snohomish and King Counties. 

If builders in Seattle were hoping to find a Christmas present under their trees from the City of Seattle through the so-called Grand Bargain they are likely to be disappointed. In fact, if they check their stocking, they might find a big lump of coal instead. The Grand Bargain was a compromise struck between high-rise developers downtown and City officials to avert the imposition of per square foot taxes on all new development of housing in the city of Seattle. The deal that was struck was as follows: citywide upzones in exchange for a program of mandatory inclusion of rent restricted housing units in new construction. Smart Growth Seattle has been looking at the numbers, and they simply don’t work. The Bargain ends up making projects infeasible because of added costs.

First, we’ve always been against inclusionary zoning on economic principle. If there are 10 loaves of bread and 100 people with money to buy bread, the price of bread, in the words of the local press in Seattle, will “skyrocket.” On the other hand, if there are 100 loaves of bread and 10 people looking to buy, sellers are likely to be offering deals, like buy one loaf get the second loaf for half off. As much as ideologues in Seattle want to claim it’s more complicated with housing, in the end it isn’t. When demand outpaces supply, prices will rise for homebuyers and renters. When prices start to climb beyond some established norm for affordability, lowering those prices starts with building more housing.

Second, the idea of forcing builders to include rent-restricted units along with market units might sound like a good idea. After all, the units would only be a small percentage of all the units built, say 10 percent. In a 100-unit building, that would mean 10 units would have their rents controlled by the City based on a standard set by the federal government. The problem is, in order to make financing for a project work, rents are also highly programed and controlled by lenders who want to be sure to get paid back. This means that higher rents in the remaining 90 units are the only way to offset the lost revenue from the 10 units that have rent restrictions. How does raising the price of 90 units to create 10 help lower overall housing prices? The truth is, it doesn’t. Inclusionary zoning is a form of rent control and is always inflationary.

Third, when we actually ran the numbers on a Small Efficiency Dwelling Unit, or SEDU, the numbers simply don’t work. Whether the additional square footage “given” to builders comes in the form of an additional floor or a 10 percent increase in Floor Area Ratio (FAR), the additional floor required would add construction costs to the project. In most cases, a fifth floor changes the whole building, because it requires concrete construction instead of wood. This additional cost would have to be absorbed by – you guessed it – higher rents in market units. Our sample pro forma showed that keeping the rents the same wasn’t enough. Don’t forget also that a 60 unit building with an inclusion requirement of seven percent would make for locked-down rents far below market rates in four of 10 new units created. The math says that the project wouldn’t work.

Smart Growth Seattle has been expressing skepticism and working on behalf of builders in Seattle to either send the bargaining team back to the negotiating table to get a deal that makes economic sense; or, alternatively, a deal that actually creates upzones that in turn create projects with new housing, or a fee for affordability that doesn’t increase overall prices or make projects infeasible. As unlikely as that may be considering basic economics, the holidays are a season of miracles – maybe one will happen in Seattle for housing.