Average Apartment Price In Seattle - A typical new building in Seattle's South Lake Union neighborhood is a six-story apartment building just north of downtown. Photo by Dan Bertolet, used with permission. A typical new building in Seattle's South Lake Union neighborhood is a six-story apartment building just north of downtown. Photo by Dan Bertolet, used with permission.
The concept of the "greedy developer" is alive and well in North America. A recent UCLA study found that the most powerful catalyst for opposition to new housing construction is the belief that developers are making too much profit. And in growing Cascadian cities like Seattle, that belief creates an anti-homebuilding policy environment that exacerbates the housing affordability crisis.
Average Apartment Price In Seattle
When people see new apartments with high rents, many think that the developers are making a killing. But a typical apartment building estimate tells a more mundane story: a new apartment is expensive because it is expensive to build and run.
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Recently, my colleague Michael Andersen came up with an auditing method that boils down to the following question: What does the rent check actually pay for? In a private apartment, the rental income must cover all costs: no planned apartment building survives the concept stage unless investors believe it will generate enough rent to cover all development and operating costs.
Michael found that in a typical new apartment in Portland, Oregon, most of the rent—a third—goes toward physical construction costs. In comparison, the developer, i.e. the team that manages the entire project, gets only 3 percent. When you add in venture capitalists—early-stage backers who are often thought of as developers—the total share of the rent check going to "developers" is 8 percent. The rest of the rent includes land acquisition, permit fees, planning services, interest on loans, property tax and much more.
Bottom line: what is the rent because what is the price of a new building.
Because this is such an important fact, I repeated the exercise for Seattle and developed the numbers for a typical new six-story apartment building based on information provided by local Seattle developers. The results are similar to Michael's. Construction is the largest single cost, accounting for 39 percent of rent.
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The developer and equity investors get a combined 13 percent, which is more than the 8 percent in our Portland example, but still. So contrary to the "greedy developer" narrative, the developers don't get half the rent; they take a tenth of it. Some developers may be less ethical than others – just like any other company. But in general, their wages reflect their entrepreneurial risk and effort, just like any other business.
Overall, the analysis shows that there is no single solution to large reductions in house building costs, which means that there is no way to reduce rents for new homes. However, there are ways to remove it, and those ways add up.
My test case is a six-story residential building with a total of 75 apartments, 50 underground parking spaces and a small street-level retail space. As was typical in Seattle, it was built with five wooden floors over a concrete floor. I believe the developers started the project in mid-2014, finished three years later and took another six months to fully lease it.
The typical rent for this type of new one bedroom apartment near Seattle is $2,200 per month. As you can see in the chart above, here is the $2,200 rent check listed from smallest to largest:
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The fees paid by owners for parking are usually not enough to cover the cost of building it – in this example, $50,000 for an underground parking garage. This means that apartment renters subsidize parking with a higher rent, whether they have a car or not. The average parking fee of $175 per month costs an average of $43 per month per apartment renter.
Municipal and county electric bills totaled $530,000, with an average unit price of $7,100. The rest is the city's building permit fee, which is $2,100 per unit.
The main role of the developer is to be the general manager of the project during the three or four year development process. For this, they typically charge 2 or 3 percent of the total development cost, or in this example $690,000.
The loan, at 4.5 percent interest, with which all the construction contractors were paid, was $470,000. Various loan-related fees and insurance added another $360,000. (Current interest rates are one and a half or one percent higher.)
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These are the architects and various engineers who design the building and its interior, and the lawyers who make sure it complies with regulations.
Seattle's sales tax rate is 10.1 percent, including state and local taxes, and applies to all materials and labor that go into a building. In 2017, construction sales taxes accounted for 5 percent of Seattle's $1.2 billion general fund tax revenue. In this example, the sales tax was $1.5 million, which would increase the average price of each home by $20,000. Property taxes on the building were $64,000 and Seattle business and user taxes were another $35,000 paid by the contractors.
These people clean, maintain and repair the building. This number also includes the building's gas, waste, water and sewer bills. (Tenants pay electricity.)
Equity investors invest cash to cover development costs not covered by the construction loan. Once the building is built and leased, they receive an interest payment on the investment and get their capital back when it is sold. Investing in shares is risky – a lot can go wrong in a big home building project that takes years to build! In this example, a capital investment of about $11 million over three and a half years of development would generate $4 million in revenue, which is 15 percent of the estimated sales value of the completed building.
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A third of the land was worth $4.8 million. This is $339 per square meter of land and $64,000 per apartment. Typically, developers put up a non-refundable deposit of about 10 percent to ensure they can buy the lot later — ideally to reduce management costs right after the city gives permission to start construction. (Land prices have skyrocketed in Seattle in recent years, and sellers now require a full down payment instead of an optional deposit.)
What most Seattleites don't realize is that property taxes eat up a large portion of the typical rent check. State law caps Seattle's property tax revenue at 1 percent a year, but recent voter-approved levies and the state's school finance bill replaced that cap, raising Seattle's current tax rate to $9.56 per $1,000. The estimated $30.4 million construction cost will have an annual tax bill of $291,000 per year. Landlords typically pass these tax costs on to tenants, especially in hot rental markets like Seattle. In any case, property taxes are a cost that the expected rental income of any proposed housing project must cover in order to get the green light from investors.
The cost of physical construction makes up the largest part of the rent check. Seattle's boom increased this portion, as a lack of skilled labor and materials pushed prices up even further. Construction firm Mortenson estimates that costs in Seattle have risen about 4 percent annually in recent years. The "hard" construction costs, or costs that go into the physical structure, in this example are $228 per square foot of living space. If the value of the building had increased three years ago, the cheaper construction would have reduced the rent by about $170.
The total development cost of the building is $26.4 million, an average of $352,000 per unit. Scrolling through the list above shows that there is no clear fix when it comes to deep cost cutting. Most cost factors are relatively small and won't help much in the unlikely event that they can be completely eliminated. And there is no easy way to mitigate the biggest factors – land, property tax and construction.
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In this example, the costs typically associated with developers—their project management fees and the return of the venture capitalist—are 13 percent of the rent. Even if it magically eliminated all of these costs, it would drop the monthly rent from $2,200 to $1,900. But no one is going to risk a few million dollars and commit to four without the possibility of making a reasonable profit. farm inspectors, investors and contractors of the year. Perhaps there are socially motivated "impact investors" willing to accept a third of the returns, as Michael suggests in his Portland study? This reduces the rent by $80 per month.
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