1. BOMA Seattle King County
Real Estate in Greater Seattle: An Olympia Perspective
Washington Center for Real Estate Research
University of Washington
realestate.washington.edu
January 28th 2019

2. RISK:
The likelihood that an expected future outcome will not happen

3. Presentation Brief
Housing markets, and commercial markets interact in unique ways
Housing determines many retail spending patterns
Commercial working patterns influence where people want to live and…
How they want to live!
Taxation policies and other policies aimed at one part of the market have influences on other real estate sectors

4. Real Estate Market Issues in Olympia
Condominium Liability
Specific supply side issue
Buildable Lands / GMA Issues
General supply constraint
Changes to REET
Major issue affecting all real estate
Capital Gains Tax (9%)
Not residential?
Changes to B&O Tax Rates on Service Businesses
Increase tax rate from 1.5% to 2.5%

5. Ability to trade up or down
Basics of urban housing markets
Housing Ladder
Ownership Price Insensitive
Ownership - Trade-up
Ability to trade up or down
Ownership - First-time buyers
Rental Tenure
Idea of Social Equity
You should also see movement between different housing types and tenures

6. Basics of urban housing markets
Housing Ladder
SF Houses close to the city
Higher-end townhouses close to the city
Highrise urban condominium - upper floors
Ownership - Trade-up
SF Houses inner suburbs
TH close to the city
Highrise urban condominium – lower floors
SF Houses in suburbs
TH in inner suburbs
Ownership - First-time buyers
Mid-rise higher density condominiums near city
Townhouses in inner suburbs
Quality
Rent/Price
Mid-rise Lower density condominiums closer suburbs
Small SF Houses / Townhouses in outer suburbs
Mid-rise higher density condominiums in outer suburbs
High quality MF Suburban Housing
Medium Quality MF Housing closer to the urban core
Rental Tenure
High quality MFH in the suburbs
Medium quality MFH closer to the urban core
Rental tenure most vulnerable
Millennials largest demographic grouping – Average Age is 26
Average age first time buyers – 31.5 and rising
Average age to trade up – 39
Older apartments and hotels - ADUs
Rental properties far away from the urban core
Each rung on the ladder represents a particular submarket

7. Median House Prices by type
As rates go up, payments go up for the same amount – usually means that people cannot bid up prices and housing becomes relatively more affordable.
Statewide Overall Median = $373,800
Condo Median = $323,200
Source: Zillow, NWMLS, WCRER.

8. Housing Affordability Index - Washington
Note that values above 100 represents a median household income in the county and a median house price with a 20% down payment given prevailing interest rates.
Sometimes lending criteria are more loose than others – we use consistent measures as 25% of gross income dedicated to mortgage repayments.
Current overall is indicating that a typical median household could afford to pay 6.1% more than the WA median house price
First time buyers index is calculated using 70% of median house price, a 5% down payment, and an income at 80% of median – 61.7….
Source: Washington State Housing Market Report: WCRER

9. Building Permits by Type
Clear that developers are responding with multifamily housing, as expected.
But it is all rental…
Source: US Census Bureau, WCRER

10. Building Permits by Type
Total Permits
SFH Permits
MFH
TH/SFR
Condominium
1745 Apartment Permits
Source: US Census Bureau, WCRER

11. Building Activity by Type – Select Markets
Spokane has no condominium units being built. Across the border, there are over 50 units under construction (excluding those targeted to vacation homes)
Vancouver only has one 40 unit development underway (luxury) and several ‘planned but on hold’ Portland has few developments except for high end (Hoyt Street 150 units – many over $1m). No suburban developments.
Initial figures show there are no new 20+ condo developments taking place in Snohomish, Kitsap, King, or Thurston Counties.
In Pierce County, most of the condominium development is represented by the Ruston Point development.
Source: US Census Bureau, Sightline, WCRER

12. Building Activity by Type – Select Markets
Spokane has no condominium units being built. Across the border, there are over 50 units under construction (excluding those targeted to vacation homes)
Vancouver only has one 40 unit development underway (luxury) and several ‘planned but on hold’ Portland has few developments except for high end (Hoyt Street 150 units – many over $1m). No suburban developments.
Initial figures show there are no new 20+ condo developments taking place in Snohomish, Kitsap, King, or Thurston Counties.
In Pierce County, most of the condominium development is represented by the Ruston Point development.
Source: WCRER

13. Condominium Liability
Under the current regime, there is a 100% chance that a condominium developer is going to get sued
Anecdotal evidence suggests that insurance premiums average about $35k per unit developed
Developers will build is the deal pencils out!
But the actual risk and potential for unlimited liability means that they will only pencil out when the marginal unit price reaches a point where they can take that risk on
HOA Members must sue the developer

14. Current Supply Dynamics
Housing Ladder
SF Houses close to the city
Higher-end townhouses close to the city
High-rise urban condominium - upper floors
Ownership - Trade-up
SF Houses inner suburbs
TH close to the city
High-rise urban condominium – lower floors
SF Houses in suburbs
TH in inner suburbs
MISSING HIGHER DENSITY HOUSING OPTION
Ownership - First-time buyers
Townhouses in mid-suburbs
Quality
Rent/Price
MISSING HIGHER DENSITY HOUSING OPTION
Townhouses in outer suburbs
MISSING RUNG OF THE LADDER ON SUPPLY
High quality MF Suburban Housing
Medium Quality MF Housing closer to the urban core
Rental Tenure
High quality MFH in the suburbs
Medium quality MFH closer to the urban core
All of the missing options are typical for first time home buyers!!
Older apartments and hotels - ADUs
Rental properties far away from the urban core
Vacuum between rental tenures and first time buyers
This is called the MISSING MIDDLE

15. Commercial Market Problem
Owners and Renters have different spending patterns
Owners have equity to generate wealth
That can be spent AND invested elsewhere
Rental housing is on the lower edge of affordability
No middle ownership market, rents go up
Dynamics of the urban environment change
What does downtown look like if only rental housing is available?
What if demand for office space declines?
The ‘donut’ concept

16. Capital Gains Tax Exemption Problem
Likely to influence holding periods?
Increased tax liability at reversion
Exemption Problem
For residential real estate investment, you will see higher demand into a housing market already short on supply
If only primary residence is excluded…
Risk and…
Owners will need to increase rents in order to meet the expected return or owners will need to find increased operating efficiencies
Many smaller landlords will sell their properties rather than face increasing regulatory uncertainty – especially in Seattle

17. REET and B&O Taxes REET Similar to Capital Gains Taxes B&O Taxes?
But this will hit everyone
Will decrease overall housing turnover
Owner occupiers have returns expectations
B&O Taxes?
Service employment represents approximately 66% of all private sector employment in Washington
Tax on Gross Receipts not Net Income
Effect on small to medium sized businesses
Effect on demand for retail space
Requirement for retail ground floor in multifamily developments in parts of Seattle

18. Summary Proposed Condominium Liability Changes Buildable Lands / GMA
Will lower the risk of condominium development
Positive impact for some types of commercial property
Buildable Lands / GMA
Currently there are provisions that contradict each other
Makes the development process more risky
Either go with more flexibility or less flexibility – currently a source of uncertainty
Capital Gains Tax
Research shows that a change in tax policy also changes investment behavior
This particularly true in real estate markets where reversion value is a major component of total return in investment modeling and expectations
Has the potential to make housing less affordable
Dependent upon which real estate sectors are exempt

19. Summary REET Changes Increasing B&O Rates on Service Businesses
Will be similar to changes in Capital Gains Tax
More comprehensive and likely to have a negative impact on housing turnover
Increasing B&O Rates on Service Businesses
Restricts employment opportunities in the largest proportion of the WA economy
Ironically, might be good for affordable housing because demand for housing might decline (fewer jobs)
Risk of starting a business increased because it is a gross income tax
Other Items
Rent Control
Janitorial Services - Is this different taxes on service businesses?
Sales taxes on leases and rents
See above on expected returns…

20. Conclusion
Residential markets influence commercial real estate demand and vice versa
While framed as taxes on business rather than homeowners or renters, the proposed tax changes have the potential to negatively impact housing markets
Other measures proposed on the fringes act to increase the regulatory risk associated with real estate investment across all sectors
Does making the anticipated future outcome less certain increase or decrease risk?

21. Will proposed legislative change my risk profile?
Final Questions
Will proposed legislative change my risk profile?
How will these changes influence other sectors of the real estate market?

22. BOMA Seattle King County
Thank You
Washington Center for Real Estate Research
University of Washington
realestate.washington.edu
January 28th 2019