Why Seattle will fund fewer new affordable housing projects this year

Seattle will award far less money than usual this year for new affordable housing, the city’s Office of Housing announced Wednesday, a blow to nonprofit developers working to meet a growing community need amid rising construction costs and higher-than-expected interest rates.

The housing office will fund four new affordable housing projects at a cost of $53.3 million. By comparison, the annual announcement hasn’t dipped below $100 million since 2018. Last year, the city awarded $147 million for 12 new projects.

Nonprofit developers applied for $380 million this year.

Meanwhile, the city will spend $90 million backfilling the rising costs of the roughly 70 projects and 7,600 apartments in the works already. All 70 are at varying stages in their development, said Office of Housing spokesperson Nona Raybern.

“All that is going to mean that the work to scale the production of new homes is going to be reduced,” said Patience Malaba, executive director of the Housing Development Consortium of Seattle-King County.

The city will also dedicate $13.4 million toward helping lower income people buy homes.

More than a third of the 309,000 new homes required across King County in the next 20 years need to be affordable to people making 30% of area median income or less, which is $37,000 for a family of three, according to recently approved estimates from the Metropolitan King County Council.

Seattle will need 112,000 new homes over the next 20 years, including 44,000 for people making less than 30% of the area’s median income, according to those projections.

The staggering need has forced the housing conversation at the state, county and city level and spurring record investment and changes to zoning codes. But producing enough homes to stabilize rents and make a dent in the homeless population will likely require further action.

The small award announced Wednesday is a disappointing piece of news, especially following the approval of a $1 billion Seattle housing levy in the fall and the 2020 approval of a city payroll tax dedicated to funding housing.

“The post-pandemic situation has been really difficult,” said Sharon Lee, executive director of the Low Income Housing Institute.

The lower number is reflective of a few things. The city spent heavily in recent years to respond to the pandemic, and the Office of Housing has property near future transit stations it plans to bid out for development later this year and is holding some funds in reserve.

But the main driver is the Office of Housing’s need to backfill projects it already has helped fund. Although the city always helps with ongoing operational costs, this year it will devote $90 million toward propping up the 70 projects in its pipeline as costs on each rise.

“Once we award and make that commitment, it’s a priority to follow through on that commitment,” said Office of Housing Director Maiko Winkler-Chin. “When you apply to us, it’s a guess. As projects come into us at this point, they’re coming in at a much higher cost.”

Familiar forces in the local construction industry have helped push up the costs of affordable housing projects. The up to 484-day wait for a permit, as well as the 2022 concrete drivers’ strike and supply chain challenges have meant that initial cost estimates fall short as interest rates have risen over the lifespan of a project.

“When you start with a project, you put in an escalator,” said Lee. “But the escalator factors we put in did not put in the huge increase in interest rates for financing.”

The main challenge, however, has to do with how financing works on affordable housing projects, said Ben Maritz, an affordable housing developer. Affordable housing projects begin with a construction loan to build the housing. They remain on that loan until the developer can show it is receiving rental income on 90% of its units, at which point they can convert to a long-term — and cheaper — loan.

Generally, that process takes two to three years, said Maritz, but that timeline has stretched since the pandemic began. Housing projects are struggling to get above 80%, either because not all the units are occupied or because residents are not paying what rent they do owe. As a result, projects are spending longer on their construction loans and therefore paying more in interest than they forecast. When they do convert, the rates are much higher than several years ago.

“These properties have to convert, and everybody knows it, so Office of Housing knows if they don’t put their money into helping these projects, this whole system breaks down,” Maritz said.

Affordable housing developers rely on money from the city of Seattle to round out the dollars they get from tax credits and private donors. The city primarily draws from its housing levy, mandatory contributions from private developers and, more recently, a payroll tax on large businesses, dubbed JumpStart.

While the new housing levy is nearly triple the size of the previous one, there are questions about the other two sources. Permits to build new for-profit housing are down, meaning contributions from developers are also declining.

Additionally, the city is looking at a $230 million budget gap next year. While the previous City Council earmarked most of its payroll tax for housing, it’s among the options the mayor and City Council are looking at to close that gap. Unlike some funds, JumpStart tax revenues could be diverted to the general fund.

Housing developers are likely to keep pressure on the city not to use JumpStart to close the deficit, “safeguarding the funding streams we have now,” Malaba said.

The four projects funded this year will be in the Central District, Lake City, Beacon Hill and Bitter Lake. When completed, they will provide 443 new homes.

Material from The Seattle Times archives was included in this report.