After it passed the Seattle’s city council vote last Monday, a new housing levy increase is set for general election vote in August that would double the amount currently paid by property owners. This housing levy will affect all single family homeowners, but for apartment building owners the impact may be felt in a very big way.
The fee is based on the value of the assessed property, and for apartment building owners the tax is calculated on a per unit basis. For larger projects, with over 80 units, this expense can be pushing towards an incremental $10,000 yearly expense. “Owners, in the past, have been able to pass that expense to their tenants in the form of additional rent,” said Jason Wilcox, a managing director for SVN in Kent and an owner of six multifamily buildings in Seattle.
“It is predominantly the smaller property owners that will feel this housing levy increase,” said Sam Wayne, a senior research analyst for Colliers International. “It’s a major issue that is going to make an impact in the future.”
It is predominantly the smaller property owners that will feel this housing levy increase
In Seattle, nearly 70 percent of multifamily buildings are owned by small private investors, many using their property investments as a way of securing an additional form of retirement income, says Wilcox. “I think the actions of the city council and the mayor are going to backfire on them a little bit, because landlords have such a tight operating margin,” he added. “Right now operating expenses are averaging around 35 percent for an average-sized building, and for higher-end amenities it is up around 40 to 45 percent.”
Wilcox added that once smaller expenses are added into the equation, such as the housing levy, these operating expenses continue to rise. The long-term trend has been that operating expenses have been increasing at a higher rate than rent increases.
In addition to increasing the affordable housing inventory pool, the city is also making the operations of existing properties to become more restrictive, says Wilcox. This causes it to be more difficult to operate on a profit where a building owner can afford to put the capital back into improvements on the building that are needed, he added. “The challenge is going to be that the operating expenses need to keep up at the same rate, or they’re going to outpace rent growth. This ties back to housing affordability for most tenants. Not necessarily just the affordable housing low-income tenants, but everyone in between as well.”
For instance, an increase from $1,800 to $2,200 a month in rent could create an affordable housing problem for young professionals or middle-class working people. As expenses continue to go up, Wilcox believes it is going to drive rent to where Seattle may begin to see affordability problems. Not only that, but Wilcox says if operating costs continue to climb at a rate higher than rent growth, it may cause some building owners to question how long they want to own older buildings. He believes it may also create a higher barrier for new investors.
If the levy passed in August, it will go into effect at the end of this year, when the current housing levy expires. Wilcox believes that the immediate effect will be a slight increase in rental rates, perhaps around $6 to $10 a month, because of the increase of building owners’ operating expenses. “I don’t know that it is going to have a dramatic impact on the apartment market, it’s more of a kind of flea bite,” said Wilcox. “It’s an annoyance, but it won’t change very much. In the big scheme of things, for renters, it’s not a lot. However, all of these things do add up for apartment building owners. For some smaller properties, it may become a big factor to be considered.”
Based on an analysis conducted by Miles Garber, the vice president of research for San Francisco-based Polaris Pacific, there are approximately 2,174 multifamily buildings in Seattle. These buildings offer a total of 89,604 apartment units, with an average of 41 units per building. From 1990 to 1999, the average building delivered 42 units into the market. From 2000 to 2009, the number went up to 84 units, and from 2010-2015, it went up to 115. “The average size building is progressively climbing, and has been since 2000,” says Garber. “There’s a difference between an individual owner, who owns multiple 10-unit buildings, and a large institutional investor. The tenants are going to get hit with a rent increase, even though the overall market is not going up.”
