Home Industry News Despite Heavy Regulation, Seattle’s Microhousing Fundamentals Remain Strong

Despite Heavy Regulation, Seattle’s Microhousing Fundamentals Remain Strong

Kidder Mathews, Seattle, Simon Anderson Team
Image Courtesy of Kidder Mathews

By Meghan Hall

In and of itself, the term “microhousing” easily conveys the compact size of the residential units that have, over the past couple of years, become a hot item in Seattle’s increasingly expensive multifamily market. As the smallest form of housing that developers can legally build within Seattle, the product type is known widely by consumers as a more affordable option—one that can help them remain at the center of Seattle’s urban core, as opposed to accepting lower prices and relegation to the suburbs. This demand, driven by renters, developers and CRE experts, has been enough to sustain the regional microhousing market despite heavy regulations implemented at the municipal level, according to a special report released by Kidder Mathews. Released during the fourth quarter of 2019, the report touts 2019 as the “year of the micro.” 

“It has been an interesting year, for sure, and there have been quite a few microhousing apartment sales,” noted Jerrid Anderson, executive vice president at Kidder Mathews. “I think that what the additional volume of sales allows us to do is get the product type in front more people that are not owning or developing it. Through that, I do feel that the market these last 12 months has started to recognize microhousing as a necessary product type.”

There were seven micro apartment building sales in 2019, all in top locations, which garnered a high level of competition. The result was that sales prices per unit was pushed to 15 percent higher than micro sales that occurred prior to 2019. Of the seven transactions that took place in 2019, the sale of the Footprint Cal Park complex on 12th Ave. was the priciest; the 78-unit property traded for $14.5 million, or $185,897 per unit. The second largest micro transaction was for 79-unit Footprint Phinney, which sold for $10.55 million, or about $133,544 per unit. The sale of the Footprint Wallingford on Meridian Ave. was also notable; while the total sales price came in at the lower end, at $7.15 million, the price per unit was notable, at $178,750 per unit. All of the properties that traded were either constructed in 2013 or 2014, according to the report.

However, since about 2015, microhousing production has come almost to a halt, due to heavy regulations. In October 2014, Seattle altered the zoning code for congregate housing; in March 2019, the implementation of Multifamily Affordable Housing legislation and other rezoning or up-zoning measures further reduced land where congregate or microhousing was permitted or could be feasibly developed. 

“Every change that has been made has been removing or decreasing the amount of land that can be developed as microhousing,” explained Anderson. “But contacts of mine, architects, assessors and others are very aware that this is the fastest or most efficient way of fulfilling the need for affordable units in Seattle. And so, I do anticipate in years to come that [officials] may refine some of the changes they’ve made. But with each new update from the city level, at least in Seattle, they continue to alter what is required to build this style of housing.”

Anderson continued, stating, “There are literally just a handful of sites where [microhousing] can be built in the city…Now we are looking at few, if any site, that will meet every single requirement.”

Other regulatory changes that have had an impact, the report notes, include increases in bicycle parking requirements, storage requirements and tax exemptions for SEDUs, which raised the maximum rent for SEDUs from 40 to 50 percent of Area Median Income. 

During 2019, only 950 of the 1,700 micro units and SEDUs slated for completion were delivered to market. The report sites not just regulatory changes, but construction delays, rising construction costs and concerns regarding market saturation as the main culprits. To-date, only two microhousing projects are under construction, and two more are in permitting. SEDUs, however, are faring better; there are nearly 3,000 SEDUs under construction or approved, which can double Seattle’s SEDU stock in the next two years.

Even as the market continues to mature, and even in the event of a market correction, Anderson predicts that the microhousing product type will remain a solid investment.

“There’s a large delta between the market rate and the micro, so that demand will be steady,” said Anderson. “And, if you look at a fixed supply of apartments like micros, I think investors see a unique opportunity to own something that cannot be built; there really is an opportunity for them to not have to compete as much.”