KUOW Nails the Problem of Placing Blame for Rising Rents

In March I wrote a post calling out people who blame investors for rising rents and unaffordable housing. Today I’d like to highlight some reporting that gets it right.

This story by KUOW’s Joshua McNichols is a couple weeks old, but he hits the nail on the head, and I wanted to make sure it wasn’t overlooked. Why This Rickety Building Lost The Fight Against Rising Rents

Frustrated renters often blame developers. But the reality is more complicated…

The Summit Inn started out as housing for people with mental health problems. It morphed into an artists’ hub over time because of its former owner, Peter Sikov, whose motto was to “create places where things can happen.”

Rents at the Summit Inn stayed low because Sikov didn’t maintain the building much. Over time, it slid into disrepair.

Last year, the Seattle City Council passed a law requiring that all rentals meet a standard. Apartments would be subject to random inspections.

Sikov balked. And at the end of 2014, he sold the Summit Inn for twice what he paid in 1998.

That’s when Brad Padden entered the picture.

“We bought the building at today’s market rates,” Padden says. “There was no discount to us so that we could continue with that kind of patronage of the residents there.”

Padden and his business partner bought the building for almost $3 million.

“When you buy a $3 million building, and you put $2 million into it, you have to recoup those costs,” he says.

You should read (or listen to) the entire story.

As Joshua points out, an investor can’t buy an apartment and increase the rents if the previous owner doesn’t first put it up for sale. If you insist on having someone to blame, perhaps you should be blaming the sellers, not the buyers.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

21 comments:

  1. 1

    Excessive High Rents

    Are destroying Seattle/s charm and livability.

  2. 2
    ESS says:

    It is fashionable to blame higher rents on greedy developers or landlords, but the issue is much more complex.

    What some people consider to be excessive rents are a combination of the marketplace, government taxing authorities and intricate and excessive government regulations at all levels.

    Certain areas in Seattle are more expensive because they attract more people than there are available residential units. As a result, those residences cost more to reside in. Less popular areas don’t have the demand as the others do, so those rents are not as high. This is pretty basic supply and demand stuff which most people understand, even if they are not willing to acknowledge it. But let’s face it, the Seattle area is one of the best places in the country to reside, and tens of thousands of newcomers are moving here with that in mind.

    But forgotten in the ad hominem attacks against developers and landlords are not only all the taxes that are associated with building and maintaining property, but all the regulations that both builders and landlords must adhere to. This increases the cost of operating rental housing, and those costs are then passed on to the consumer.

    The building process is long and arduous. Not only are there all sorts of related costs (obtaining the land, the permits, the materials, and the labor), but administering these through a Byzantium group of codes and ordinances is time consuming and expensive. Even land costs have been driven sky high by the implementation of the Urban Growth Management Act. It is no wonder that housing costs have increased dramatically in the Seattle area.

    There are all sorts of expenses in operating a rental unit. Putting aside the obvious expenses of maintaining the unit, there are all sorts of related expenses. Common utilities such as hall lights, water sewage and garbage are not only expenses that are indirectly paid by all tenants, but the taxes levied on those services are also paid by the tenants. Repairs are also taxed, and those taxes are paid by the tenant. Even the landlord tenant act which makes it time consuming and difficult to evict a tenant that isn’t paying their rent is an expense that is figured into the rental costs. And don’t forget the inspections and business licenses that many jurisdicitons insist upon, raising the costs for tenants.

    But the largest tax that the tenant pays indirectly are the property taxes on the premises he or she occupies. Oh, that tenant may not pay directly for those property taxes, but they do through their rent. Many just don’t understand that.

    And those property taxes have been skyrocketing. For a single family house in Seattle, they can be up to five thousand dollars a year or more. Apartments may be less, but taxes on apartment units can be over two thousand dollars a year. It is the tenant that pays for those taxes, as those expenses are passed on to the tenant in their rental amounts.

    And why are those property taxes skyrocketing? Because in Seattle and surrounding communities, voters constantly approve any and all initiatives for all sorts of alleged good causes and needs. All fine and well, but someone has to pay for all these programs, and it is often the homeowner directly, or the tenant indirectly. On their tax assessments, Snohomish County indicates what percentage of taxes are voter approved. In one larger South Snohomish County city, they are over 50% of the property tax bill.

    Initiatives are easy to pass, because they not only tax residential property which does not have an immediate impact upon one’s wallet, but it is presented that it is only a small increase in property taxes. But these taxes added year after year start to add up after a while. Most renters have no idea what these initiatives are about, and who will pay for them. Often they are in favor of many of these initiatives, believing that it is only a small amount of money, and that some other person is going to pay for them as they don’t own property. And the good intentions funded by a tax increase are always good when someone else gets stuck with the bill.

    Most tenants have no understanding of what their particular housing unit is appraised for, and what the taxes are for each residential unit. They don’t have any understanding that not only do these initiatives add up over time, but that they are paying for them. Easier to scream that the landlord is trying to get as much money from them as possible, rather than investigating the real reasons for their rent increases. Of course these are the same people who will try to get as much money at their jobs, and no one will accuse them of being greedy. And those people will never forgo the move in specials when vacancy rates are high and landlords are desperate to fill their units.

    And these are the very same people, when taxed directly for what seemed to be a good Seattle type of progressive cause, will overwhelmingly reject those taxes when coming out of their own pockets directly. Witness the ten cent a cup coffee tax proposed by Seattle a few years ago which was to pay for pre schooling. After much screaming, it was decisively defeated by over 60% of Seattle voters. Many progressive hipsters who will vote for anything so long as they don’t have to pay for it overwhelmingly refused to tax themselves directly 10-30 dollars a year for what most Seattleites consider a good cause – children.

    And while on the subject of expensive housing, let’s not leave out the Urban Growth Management Act. That act removed buildable land from the surrounding areas, and forced developers to increase density within identifiable city borders. Seattle area hipsters may be in favor of saving the trees and open spaces, but there are no free lunches or free buildable lots. That act has caused the price of developable land to skyrocket. Years ago, the lot for a typical Seattle area house was about one third to one half the overall value of a property. These days, unless the house is large and expensive, the most expensive component of owning a house is the land it is built upon, and that price can be a multiple of the value of the house.

    So rather than blaming everyone else for high rents, renters should look in the mirror to determine why rents are so high. To paraphrase a famous cartoon figure -“We have met the cause of high rents, and that cause is us”.

  3. 3

    I don’t have to like it, but the reality of the situation is that there is an ever increasing number of people who are moving to Seattle for work, and that a lot of the jobs they are moving here for are high paying. It’s a mixed bag. On the one hand, there are more places to get a good microbrewed beer or an artisan sandwich made with in house cured meat.
    On the other hand, when a local real estate market is not going crazy, it allows landlords to not have to maintain properties to the highest standards, which, in turn, allows landlords to still make money while keeping the rent low, which, in turn, allows working class and creative people to live in a city.
    For a city to be truly cool, it needs to have included in it’s mix, old beat up buildings with character, and an economically diverse population. In Seattle, many people working for lower wage jobs are coming in from further out, and within Seattle itself it’s more of a professional class.
    I’m not blaming the landlords. I’ve been one.
    On another note, the seller in the story, Pete Sikov, is something of a character. He’s the guy who bought Jimi Hendrix’s boyhood home in the Central District, and had it moved to Renton. He was supposed to have it restored, but it said boarded up and neglected until the City of Renton ordered it demolished. Not far away, on Martin Luther King Way headed towards Seattle, he was the landlord of a tavern that had shootings and other incidents of violence. After the sheriff had it closed, it sat boarded up and neglected until King County ordered it demolished. On the property where the tavern stood, he has several times invited homeless to set up a Tent City there for a few weeks at a time.
    Pete Sikov comes from that era where, as a landlord, you could afford to do that. When I first moved here in the 70’s, I lived in a few run down places with cheap rent, places a landlord would not fix up. With properties as high priced as they are, the taxes will kill you unless you fix up the places and charge a lot more rent, or tear down, or sell.
    I wish it were a different world. One where you aren’t forced out of your house or the city because of the high taxes. But the government itself loves the development. Sure, they put up all kinds of obstacles and roadblocks, but then all the increased property tax revenues sooths the savage beat.

  4. 4
    boater says:

    By softwarengineer @ :

    Excessive High Rents

    Are destroying Seattle/s charm and livability.

    Seattle’s charm and livability are destroying Seattle’s livability and charm. If it wasn’t a desirable place we would have a different problem but it is so you get what comes with increased demand. Combine desirability with geographic limitations, inadequate infrastructure to deal with the demand and you have our situation. It’s a problem if you can’t afford it and progress if you can.

  5. 5
    pfft says:

    “The building process is long and arduous. Not only are there all sorts of related costs (obtaining the land, the permits, the materials, and the labor), but administering these through a Byzantium group of codes and ordinances is time consuming and expensive.”

    umm, builders build for a living. after a little while it shouldn’t be all that hard to navigate. I guess we could deregulate but we all know how that game ends. subprime homes and apartments.

  6. 6
    Shoeguy says:

    By softwarengineer @ :

    Excessive High Rents

    Are destroying Seattle/s charm and livability.

    There was a time not terribly long ago when “Seattle” and “Desirable” were two words that you would never see together….yet the mountain and the water has always been here.

    Go figure.

    I miss the 90’s when nobody gave a crap about the rainy Pacific Northwest.

  7. 7
    redmondjp says:

    By Shoeguy @ :

    By softwarengineer @ :

    Excessive High Rents

    Are destroying Seattle/s charm and livability.

    There was a time not terribly long ago when “Seattle” and “Desirable” were two words that you would never see together….yet the mountain and the water has always been here.

    Go figure.

    I miss the 90’s when nobody gave a crap about the rainy Pacific Northwest.

    Ditto. When Almost Live was played BEFORE the national sometimes-funny comedy show! I didn’t move here permanently until 1995, but when I came to visit before then I was always in front of a TV on Saturday night at 11:30pm.

    And SFHs as well as rents were actually affordable. And Microsoft stock options were still worth something! Those were the days . . .

  8. 8
    Deerhawke says:

    It is a truism of economics that for a given product at a given level of quality that supply and demand will meet at a certain price and a certain quantity supplied to the market.

    The Seattle City Council is putting a floor on quality and making lazy slumlords subject to inspections and sanctions if housing is not up to a certain minimal level. Fair enough. But what that does for a guy like the landlord I had in college ( a city employee named Virgil who worked 8-5 and never had time to maintain his properties) is make him sell off to somebody who actually will make it a profession but also expect to get paid.

    So when rents rise because the quality of rentals is higher, the City Council then complains that housing is not affordable and blames landlords for being greedy. So their next proposal is rent control. So in a time of surging demand, they want to control quality and price. But the market still gets a vote through the amount supplied. And that is why it is that in every place where strict rent controls have been put in place, new construction of rental housing has come to a halt. Only for- sale condos get built and they are very, very expensive.

    We are treading a path already traveled by New York and San Francisco. The economic history of rent control in those cities is thoroughly documented. Our City Council is doing the same things in the same order as in those cities but thinking that somehow this time the laws of economics won’ t apply.

    Wanna bet?

  9. 9
    Blurtman says:

    Is it bad to profit?

  10. 10

    Hard to blame government for trying to reign in slumlords, but this is yet another situation where those who government hurts the people they are trying to help.

  11. 11
    redmondjp says:

    By Kary L. Krismer @ :

    Hard to blame government for trying to reign in slumlords, but this is yet another situation where those who government hurts the people they are trying to help.

    Yep.

    The very same government that will kick you to the curb of your own home if they determine that your septic system has failed, for example (without offering one whit of assistance). After taking thousands of dollars per year of your money (a lot of which they use to pay for other people’s rent, food, and medical care).

    The founding fathers of America, if alive today, would and could not even comprehend what we have become . . .

    Over here east of the lake in Redmond, our local governmental leaders also wring their hands in angst about the lack of affordable housing, while simultaneously doing everything which hastens to eliminate it.

  12. 12
    David B. says:

    RE: ESS @ – The GMA would be less of a problem if it was easier to add density. It’s when you ban BOTH density and sprawl that the real housing affordability problems happen.

    And the GMA at least does force cities to plan for growth and has had a far less adverse effect on housing prices than coastal California’s far more disorganized anti-growth policies.

  13. 13
    David B. says:

    RE: Shoeguy @ – “I miss the 90’s when nobody gave a crap about the rainy Pacific Northwest.”

    You mean when Emmet Watson was still penning column after column about “Californication” because newcomers were being blamed for driving prices up.?

    Plus ça change…

  14. 14
    Mike says:

    By Kary L. Krismer @ :

    Hard to blame government for trying to reign in slumlords, but this is yet another situation where those who government hurts the people they are trying to help.

    How do you see the rental quality regulations hurting developers? As Deerhawk pointed out the net effect will be to force small landlords with decrepit buildings into selling, providing developers with more buildings to renovate or replace. That seems like a winning situation for developers.

    Surely you’re not inferring the government is trying to help “the poor”? Heck, a lot of those people don’t even vote. They certainly don’t contribute to election campaigns or yield influence unless someone else with money decides to exploit them for gain. So I’m not seeing how raising the bar in minimum rental standards is actually hurting. In fact you could argue that some of the poor will benefit as many development deals set aside a handful of below market rate units.

  15. 15

    RE: Mike @

    Yes Mike

    The wolves are preaching to the henhouse. Renting trash at 2000+ a month for one bdrms is expecting only high paid workers to qualify for the rent [or expecting 3-4 low paid workers to share the rent]. Expecting lax inspection requirements to lower rents is a livability issue and not a quality of life requirement.

    Time to bring in the barracks bunk beds like a military base or find a freeway green belt you can poach a tent…

  16. 16
    Deerhawke says:

    The question of whether this is “yet another situation where those who government hurts the people they are trying to help” is an interesting one.

    I have no problem with enforcing certain minimal housing standards. But when we eliminate substandard housing, we should not expect that this will happen without any cost to the consumer, especially the poor. They may get safer and better maintained housing, but it will cost more.

    I also support low income housing. But Kshama Sawant, Mike O’Brien and others on the City Council are leading the charge to impose a linkage fee of $11-22 per square foot of construction — paid up front on top of permit charges, no less. And they want to hand this over to subsidized developers of low-income housing who build at an average of $350-450 per square foot (no typo there). Sawant and O’Brien have consultants who testify that this extra tax will not be passed on to the public, but be absorbed by the developers. But nobody who knows anything about economics takes this seriously. Again, at a time of surging demand and insufficient supply, that cost is certain to be passed on to the consumer.

    If you drive up the quality of housing, and add very substantial development fees for new construction of rental housing , why should you be surprised when rents surge and the public is outraged. At that point, the only thing for a canny politician to do is to try to channel the rage at the “greedy landlords” and “greedy developers” and call for stringent rent controls, even when you know that this is precluded by state law.

    Maybe I am a bit jaded, but I am not sure whether all in government are really trying to help the poor. Sawant has a PhD in economics and taught at the college level. She understands the basic economic principles quite well. It seems to me that she is clearly trying to promote an anti-capitalist ideology and probably feels that the movement could be helped by more economic chaos and an angrier, more radicalized electorate.

    Unfortunately she is the one calling the tune on the City Council right now and others like O’Brien have become her followers.

  17. 17
    boater says:

    RE: Deerhawke @
    I have my doubts at to whether Sawant will be re-elected. I think her election was a fluke get the other guy out thing and she won’t be there long. Time will tell if that’s correct.

    Screaming for rent control when you know you won’t have to implement it is the perfect political solution. You look like you’re trying to help but get to say you just couldn’t do it because the power wasn’t in your hands. Hell it even becomes something handy you can point to when you go to run for a State or Federal office.

    I can see the argument the city is presenting regarding the linkage fees. Basically they are claiming that there is so little rental units available that rents are as high as the market can bear. The claim is not that the builders won’t want to pass the fees along it’s that they just can’t because the market wouldn’t bear it. That won’t stay true for ever but it seems somewhat believable at the moment. I guess one way you can test it is just raise your current rents to match what it would cost if you were paying those linkage fees and see if you can rent the unit.

  18. 18

    RE: Mike @ – I was referring to trying to help tenants, and in the story we’re discussing the help resulted in their rent skyrocketing. But again I’m not trying to say that this particular instance of trying to help wasn’t reasonable–more just commenting on how government often hurts the ones it’s trying to help.

    The best example of that was Seattle making non-refundable deposits illegal. Landlords used to provide that it wasn’t refundable if the tenant left within a year. After that they all moved to one year leases, which have a lot more liability to a tenant than the amount of a security deposit. And it also results in less flexibility for them as to move timing.

  19. 19
    Mike says:

    By Kary L. Krismer @ :

    RE: Mike @ – I was referring to trying to help tenants, and in the story we’re discussing the help resulted in their rent skyrocketing. But again I’m not trying to say that this particular instance of trying to help wasn’t reasonable–more just commenting on how government often hurts the ones it’s trying to help.

    What is the connection between improving minimum rental standards and “helping” low income tenants? To me it seems like this regulation is squarely aimed at improving the quality of rental stock through renovation and replacement. It will eliminate a good deal of housing that is “affordable” because it is deteriorated. Anyone observing that situation can see that it will reduce the supply of inexpensive houses and apartments. Raising both the price and quality of the least expensive housing units doesn’t necessarily help poor tenants, why would it?

  20. 20

    RE: Mike @ – I take it you’ve never seen an apartment that didn’t have any heat, or an adjacent apartment that didn’t have a single window and only one door.

  21. 21
    ESD says:

    I think what we are seeing in the Central District is many middle class families bought homes in the CD 30-50 years ago. As they have gotten older and are more “empty-nesters”, it is hard to pass up an offer of 500k-1M for their fully paid-off home when they do not have the income to maintain or restore it and would rather lock up the cash for retirement and healthcare. Many of those homes are not worth restoring or maintaining. Of course they will be sold to the highest bidder and redeveloped with more density.

    In regards to the plea for sympathy by ESS in the above post, those are all the costs of doing business in the world of development. We all know the costs of lack of regulation and oversight. There is a balance that must be struck between the right to profit and not creating negative externalities. I suppose developers could make more money if they did not need to install windows and people would most likely rent those spaces, but we, as a collective society, have decided that is not a reasonable way to live and have agreed to regulations prohibiting this practice. It is known that (whether most people know this or not) developers (investors) use a project profit threshold of 15%-20%. As land prices rise, development gets more creative in trying to maximize habitable space that can be monetized, by reducing bedroom or LR sizes, eliminating parking, seeking height exceptions, eliminating setbacks or building “group housing” with 1 kitchen per 3 sleeping spaces in order to maintain this threshold. The fact is they will continue to make the 15%-20% profit at the expense of quality of construction and livability of the neighborhood in the form of diminished parking, light, open space and general aesthetics. I do believe that developers can make a bit less profit and go a long way towards improving livability and harmony with the existing neighborhood and structures. There are developments that do this fairly decently and many others that do not. One that comes to mind is the Gatsby Apartments (a bit higher end) on 10th Ave. There is a large courtyard that could have potentially been developed as more apartments, but the developer chose to include this amenity even though the rent premium it may command may not be as profitable as actual habitable space that could have been built. The same goes for the brick facade or the inclusive parking. This project blends well with the neighborhood character, provides open space and does not create additional parking problems in the area. In addition, including the parking does not materially contribute to significant more traffic in the area, if at all. It is possible to create good harmonious developments and still turn a profit, but not all projects find this middle ground and simply wring every last cent of profit out of the project at the expense of the rest of the neighborhood. This is the problem that people have with developers. If you are a good ethical developer/investor, then make an effort to seperate yourself from the greedy unethical ones.

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