2023 Seattle & Puget Sound Micro Report

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Seattle Housing Regulations Undergo Major Changes

SEPA Gone for Housing
In April 2023, SB 5412 eliminated State Environmental Policy Act (SEPA) reviews for housing projects in Seattle and paved the way for other cities to do the same by mid-2025. Previously, SEPA had been used to delay and obstruct housing projects. This change simplifies the permit process by no longer requiring specialized reports, like traffic and historic assessments.

Design Review Transformation
The Design Review process is changing and might vanish by mid-2025. That’s because, in July 2023, CB 120591 ended design review for low-income housing and gave market-rate projects an exemption option if they chose the Mandatory Housing Affordability performance path, instead of fees. Combining this with the SEPA exemption allows developers to skip the Master Use Permit process, potentially saving eight to 12 months in apartment building permitting.

Uncertainty Around Micro-Housing
Seattle’s 2014 legislation shifted developers’ focus from congregate to small efficiency dwelling units (SEDUs), but later increased SEDU size and cost. Since then, discussions about micro-housing have been ongoing, and Mayor Bruce Harrell and Andrew Lewis have shown interest in single-room occupancy (SRO) units. While no formal legislation is out yet, there are talks of revising SEDU rules to make them smaller and more efficient. Statewide legislation might also push for congregate housing, despite local opposition.

How Seattle Killed Affordable Housing

During the last recession, micro-housing concepts emerged as a solution for those looking for a well-located, walkable place to live. These shared-kitchen micro units provided clean, safe and affordable living for $500. Then, as the city’s economy improved, competition for affordable units increased. Throughout the next seven years, micro units experienced significant development and rent growth. However, when Seattle labeled them “inhumane” and imposed development restrictions, it effectively banned new development of the most cost-effective housing option.

Red tape
Next, Seattle targeted SEDU apartments, which were slightly larger and more amenitized than micro units. Specifically, the city increased permitting obstacles, costs, and unit sizes, thereby raising downstream costs to residents by 20% to 30% and following its trend of eliminating affordable options.

Due to self-imposed rules, Seattle has only been able to provide 400 new affordable units annually for the past 30 years. In 2021, the city exacerbated the issue by acquiring SEDU apartment buildings at a premium to market rate pricing by using taxpayer money — setting an imprudent precedent. This caused for-profit developers to compete for the city’s attention by building higher-end apartments resulting in unaffordable units. And, while some housing developers benefited, many were left with costly luxury micro-housing units that are overpriced for the target market. Now, this has further widened the affordability gap for units delivered in 2023-2024.

Rent and Vacancy

Inflation hits price-sensitive residents hard by reducing demand for high-end SEDU apartments.

Notably, micro apartments have had stable asking rents, averaging $1,061 monthly during four of the past five years (even with a 9% pandemic-related dip in rents that lasted 12 months). For comparison, SEDUs saw more rent fluctuations with demand changes with a 13% decrease. Although occupancy fully recovered by 2022, new supply continues to threaten the stabilization of SEDU apartment buildings.

At the same time, vacancy rates remained at 94% for congregate micros for the third year in a row with SEDUs ranging from 92% to 95%. Now, with more than 2,000 new SEDU units under construction, owners, investors, and lenders alike will be watching rent and vacancy rates closely during the next 12 months.

Rent and Vacancy by Neighborhood

University District & Roosevelt
Operations in the U District were so bad in 2020 that we had to remove the numbers from our market averages. Fast forward to 2023 and the market has stabilized to a 95% occupancy rate with the highest average SEDU rents in the market.

Green Lake, Wallingford & Fremont
It’s rare that we see micro-housing headwinds in the 98103 zip code. However, it’s clear that demand has waned, and we suspect that residents who moved north during the pandemic are now moving closer to work again with online work fading.

West Seattle
The pandemic and bridge closure combination was painful for West Seattle investors. In 2023, we’re starting to see the effects of a depleted new supply due to limited new deliveries — namely, a higher combination of occupancy and rent growth than any other neighborhood.

Sales and Development

Affordable housing operators dominate SEDU purchases in 2023.

After beginning in 2021, the trend of affordable housing operators dominating SEDU purchases is now common in 2023. Of course, selling to affordable housing groups is profitable; however, developers who don’t get the golden ticket face losses or cash-in refinancing post-development. Likewise, congregate micros continue to sell, but aren’t popular among affordable groups. Additionally, pricing is driven solely by the above-market cash-flow micros that investors offer due to higher sale cap rates.

Short-term pain could lead to long-term gain.

With 2,280 micro-housing units under construction, it appears that there may be challenging times ahead for micro-housing developers and operators. At the same time, micro-housing permit applications are lower than they’ve been since the inception of micro-housing, which points to supply constraints after the glut of supply is absorbed, likely by 2025.

  • 68 – Unit decrease in micro-housing supply YoY due to more units sold to affordable housing operators than delivered
  • 33%- Reduction in micro-housing permit applications year over year
  • 209% – Number of micro-housing units under construction in 2023 compared to 2020

About the Simon and Anderson multifamily brokerage team
The apartment brokerage team led by Dylan Simon and Jerrid Anderson of Kidder Mathews represents investors in the sale, purchase, and financing of apartment buildings and development land across greater Seattle and Washington State. Its team of 10 brokerage professionals specializes in the sale of apartment buildings and development land from $1 million to more than $100 million. For more information, visit simonandersonteam.com.

About Kidder Mathews
Kidder Mathews is the largest independent commercial real estate firm on the West Coast, with over 900 real estate professionals and staff in 20 offices in Washington, Oregon, California, Nevada, and Arizona. Kidder Mathews offers a complete range of brokerage, appraisal, asset services, consulting, and debt & equity finance services for all property types. The firm performs $12 billion in transactions, manages 53 million square feet of space, and conducts 2,800 appraisal, consulting, and cost segregation assignments annually. For more information, visit kidder.com.


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Simon | Anderson Multifamily Investments Team
Dylan Simon, Executive Vice President
Jerrid Anderson, Executive Vice President
Matt Laird, Vice President
Winslow Lee, Associate Vice President
Max Frame, Associate Vice President
JD Fuller, Associate

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