This article is part of a series on Seattle’s proposed Mandatory Housing Affordability (MHA) program. In previous articles I identified inconsistencies in the proposal and presented case studies (here, here, here, here) on several housing types. Next up: for-sale townhouses and rowhouses in MHA’s low-rise zones.
Neighborhoods that are home to people from a range of income levels need all kinds of housing choices. Townhouses and rowhouses provide modestly sized homes for purchase. In Seattle, as in many cities, these homes are called “missing middle” housing because they help fill the gap in the spectrum of housing options between super-expensive single-family houses and higher-density large-scale apartment buildings.
Complementing my prior analysis on missing middle low-rise apartment buildings, this article looks at the potential impact of Seattle’s proposed Mandatory Housing Affordability (MHA) program on townhouses and rowhouses. MHA would allow larger buildings in exchange for a portion of homes priced for lower-income residents (below market-rate) or payment into a city affordable housing fund. If the requirements are carefully balanced, MHA can be a powerful tool for improving affordability by delivering more of both market-rate and subsidized homes—and in a shortage as severe as Seattle’s, we need both to keep prices down.
But MHA as proposed for townhouses and rowhouses is not balanced, similar to my previous findings for other housing types. The cost of the MHA mandates exceeds the value of the increased building capacity, so MHA would impede homebuilding, exacerbate Seattle’s already acute housing shortage, and undermine the program’s own goals. Unfortunately, because of the unique characteristics of townhouses and rowhouses, and unlike other housing types and zones I’ve studied, there is no straightforward fix for the MHA draft in Seattle’s low-rise zones. In fact, because missing middle housing comes in such idiosyncratic forms and yet is so important to Seattle’s housing mix, the most practical fix may be to exempt low-rise entirely.
A rowhouse or a townhouse?
Rowhouses and townhouses are homes attached side-by-side along common walls. The only difference, as the City of Seattle defines them, is that rowhouses line the street, while townhouses may stand behind one another. Both types are typically three stories tall and have one parking space apiece. Because Seattle’s single-family zones have been almost completely built out for decades, rowhouses and townhouses have long provided nearly all of the city’s additional for-sale homes with ground-level access to entries and small yards—features particularly attractive to families with children.
Larger units, fewer homes, higher prices
Upzones only increase value for builders substantially if they accommodate extra homes. Enlarging a multi-family building without upping the unit count means larger units, which provide a diminishing return to builders because home value per square foot declines with increasing size. Larger units also have higher prices, which doesn’t help people struggling to afford homes across the city. The quandary is that rowhouses and townhouses have inherent characteristics that in most cases would preclude additional units under the MHA upzones as proposed.
A bump in size yields a more expensive home–which defeats the purpose twice over.
Townhouse and rowhouse developments consist of a small number of individual homes, so adding a unit requires a major reconfiguration of the design. Unlike most other multi-family housing in Seattle, rowhouses and townhouses are usually sold, not rented. To enable “fee simple” sales—individual ownership of each home and the land beneath it—they are divided vertically over the entire height of the building. In contrast, apartment homes are stacked, allowing much more flexibility for redesign to accommodate extra units.
The number of rowhouse or townhouse units in a single development depends on the size and geometry of the site and on city rules for setbacks from the property lines, maximum allowed building length, open space, and parking access. Also, to allow for practical floorplans and accommodate a stairway, the “floorplate”—the patch of land that the building sits on—of each home cannot be much less than 400 square feet. Builders already maximize the number of units on each site within these constraints.
Floor-area ratio (FAR) almost never dictates the limit on units per site, so the additional FAR granted by an MHA upzone will rarely allow another rowhouse or townhouse on a site. If the MHA upzone doesn’t allow an added unit, the only way to use extra FAR is through bigger units. Again, the larger the unit, the less it’s worth per square foot, which erodes the value to the builder of the extra FAR. And a bump in size yields a more expensive home–which defeats the purpose twice over.
Where to put the MHA capacity?
Those problems are just the beginning. To understand the rest, consider a case study: City of Seattle planners illustrated (above) how one proposed low-rise MHA upzone (the one for the LR2 zone) might play out for an eight-unit townhouse project. Look at the plans and you’ll see there’s no room for an extra unit. Instead, the extra FAR granted by the upzone expands the size of the houses, shown in turquoise on the right. On some units, existing floors get larger; on others, homes spout fourth floors.
But getting taller is no good. Although the proposed LR2 upzone grants 10 feet of extra height to allow a fourth floor, most buyers of rowhouses and townhouses will shy away from a four-story home. Who wants to walk up and down four stories? What’s more, building a fourth floor moves projects from the easier residential building codes to the more demanding and expensive commercial building codes. Construction costs go up, typically, by 5 percent (see appendix for details). Furthermore, the proposed MHA upzone requires a 12-foot setback on the top floors, which in some cases would raise construction costs even more, by limiting design options and requiring more complicated engineering.
In sum, building bigger rowhouses and townhouses reduces the sale price per square foot for builders and reduces affordability for buyers. Building four-story rowhouses and townhouses saps buyers’ interest, reducing the sale price even more, while raising the cost of construction.
In the end, most builders would avoid a fourth floor and instead try to cram whatever extra space they’re allowed into three stories. In some cases, it would be physically impossible. In others, it would be possible but would yield units squatting close to each other and crowding the site, leaving less outdoor space and compromising livability (the “L” in HALA).
Townhouse and rowhouse feasibility case studies
I assessed prototypical six-unit townhouse and six-unit rowhouse projects, each sited on 7,200-square-foot lots in a low-rise 2 (LR2) zone. I assumed they were located in a medium market-strength area for which the proposed MHA in-lieu fee is $13.25 per square foot. Because these projects only have six units, MHA’s “inclusion” option—in which builders can provide a share of units for below-market prices rather than paying the in-lieu fee—would not be practical. Even the highest MHA fraction of 10 percent of units is 0.6 homes, and you can’t build a fraction of a house.
Following the before-and-after method I described previously, I applied static pro formas to estimate how the MHA upzone would change the homebuilder’s return on investment (ROI) compared to a baseline project under existing zoning that would deliver a 20 percent ROI—a realistic target ROI for these small-scale for-sale projects. I assumed the construction cost, cap rate, and other pro forma inputs used in the City of Seattle’s MHA feasibility study (details in the appendix).
As noted above, for townhouses and rowhouses, as unit size increases, the sale price per square foot decreases. To account for this variation in the pro forma, I assumed a range of sale prices based on a survey of 500 sales throughout Seattle in 2016 and 77 sales in Seattle’s 98122 Zip Code from 2012 to 2017, extracted from Redfin sales data (see price-per-square-foot table in the appendix).
Pro forma results for rowhouses and townhouses are summarized in the table below (full pro forma tables are in the appendix). For each building type I tested two scenarios: (1) all of the added FAR accommodated on three floors, and (2) a fourth floor added to accommodate the added FAR. In all scenarios the number of units remains constant at six.
For the three-story scenario, compared with existing zoning, MHA causes ROI reductions of 21 percent for rowhouses and 13 percent for townhouses. These results are similar to those for low-rise apartments. The hit to ROI is smaller for townhouses because the townhouse upzone grants twice as much additional FAR as the rowhouse upzone and therefore creates more value. (FAR boosts for the proposed MHA upzones for each low-rise building type are in the appendix.)
As noted above, the change in applicable building code triggered by increasing height from three to four floors typically introduces a construction cost premium of about 5 percent. As shown in the table above for the four-story scenarios, this cost premium causes a big drop in ROI, illustrating its sensitivity to added costs.
In the vast majority of cases, the MHA upzone would not enable builders to squeeze an additional unit on a site. If a seventh unit could somehow be added to these case study projects, my pro forma model projects an ROI of 19.3 percent for the rowhouses, and 21.1 percent for the townhouses, assuming height is limited to 3 stories. In other words, if MHA allowed an extra home and somehow enabled builders to bend space and make one fit, the upzone would be well balanced.
[list_signup_button button_text=”Like what you|apos;re reading? Get our latest housing research right to your inbox.” form_title=”Housing Shortage Solutions” selected_lists='{“Housing Shortage Solutions”:”Housing Shortage Solutions”}’ align=”center”]
To build or not to build?
Under MHA as currently proposed, most townhouse or rowhouse projects would try to make use of the upzone’s FAR on three floors. In such cases, compared to existing zoning, the loss of ROI caused by the required MHA fees would result in fewer projects being built—more so for rowhouses than townhouses because rowhouses would take a bigger hit on ROI.
If fitting all the FAR on three floors is not possible, then the builder has two choices: forfeit the FAR and take a corresponding hit on value and ROI, or build to four stories and pay the cost premium that takes a big bite out of ROI, as shown in the table above. Actually, the builder has one more choice: not to build at all. And many would probably make that choice, because both of the other options spell a much narrower margin for profit and a greater risk of losing money. In rare cases, a builder might find a way to utilize the added FAR in an extra unit, in which case the value exchange would be close to equal and the impact on production minimal.
Like modest-scale missing middle apartments, townhouses and rowhouses are usually built by small, local businesses that operate on thin balance sheets. They can’t easily absorb added development costs, as compared to large-scale homebuilding firms that typically have deeper pockets and access to cheaper capital. Thus the projected loss of ROI for townhouses and rowhouses—though less severe than my analysis showed for larger-scale housing prototypes—would likely cause no less harm to homebuilding, hampering Seattle’s goals for adding market-rate and low-income homes across the city. As with any added development expense, construction of rowhouses and townhouses would ramp back up only after home prices rose sufficiently to offset MHA’s net costs. That is to say: the draft MHA currently under consideration would make rowhouses and townhouses more expensive across the city, by making them scarcer.
Bringing MHA back into balance
To avoid suppressing construction of townhouses and rowhouses, MHA must be brought back into balance. For these building types, however, there are no good options for increasing the value of the upzone. Anything greater than a FAR of 1.4 gets increasingly difficult to fit in three stories without sacrificing open space, but going to four floors introduces a big cost premium because of the commercial building code. Additional FAR alone will almost never enable the addition of an extra unit to a project, which means the new homes would almost always grow bigger, draining more of the homebuyer’s bank account, while at the same time yielding less value per square foot to the builder.
Changes to design standards are also unlikely to provide much value. The proposed removal of standards for parking location and access might allow more efficient use of the site but only in rare cases. Reducing setback requirements could enable use of a bit more FAR on three floors or perhaps increase the (minute) chances for an additional unit. But it would also yield built form less compatible with the intended character of low-rise zones because the structures would press in closer to homes on adjacent lots.
To encourage rather than discourage building missing middle homes, the only effective option remaining is to dial back the affordability requirements. In my pro formas, preserving ROI at 20 percent requires lowering the in-lieu fee to $6 per square foot on townhouses, and to just $1 per square foot on rowhouses. But those numbers would only balance MHA for scenarios in which all of the FAR can be used on three floors. For projects requiring a fourth floor or in which FAR can’t be fully utilized, the in-lieu fees would have to be even lower to balance MHA.
Let’s not miss out on the missing middle
Today in Seattle, townhouses and rowhouses are the only for-sale units many families can even imagine affording. They aren’t cheap, typically hitting the market at $500,000 and up, but they are far more attainable than Seattle’s astronomically priced single-family houses, 40 percent of which currently for sale are priced greater than $1 million.
The size and shape that townhouses and rowhouses come in, the way they fit on a lot, and the quirks of their construction make them unsuitable for a one-size-fits-all MHA program. As the proposal now stands, the city is cooking up a recipe not only for stymied homebuilding, but also for unintended consequences that would arbitrarily favor some kinds of housing over others. Most of the missing middle homes that did manage to get built under MHA would be larger and therefore more expensive.
To avoid a policy that may do more harm than good, Seattle policymakers can substantially reduce the MHA requirements. But even that solution is unlikely to buffer the policy’s unpredictable ill effects on such idiosyncratic housing types. It may be better to nix MHA in low-rise zones altogether than risk nixing the missing middle housing that Seattle so sorely needs.
Thank you to David Neiman who provided invaluable conceptual guidance and did most of the heavy lifting for the pro forma calculations.
Appendix
The table below shows the assumed price per square foot sale prices of townhouse and rowhouse homes based on a survey of recent sales extracted from Redfin, as described in the text above. When residential buildings exceed three stories, it triggers a shift from the residential building code to the commercial building code. The construction cost shown below reflects an assumed 5 percent cost premium caused by that change. For a recent townhouse project designed by Seattle builder David Neiman, a switch to the commercial code required sprinkler upgrades, a central monitoring system, rated garage doors, walls, and soffits, a fire alarm system, occupant notification systems, 42-inch railings, and double-sided handrails, adding up a 7 percent premium on the total project construction cost.
The table below shows the pro forma data for before and after MHA for six-unit rowhouse and townhouse projects, assuming three-story construction.
The table below shows the assumed units sizes and their sale prices based on a survey of recent sales extracted from Redfin, as described in the text above.
The table below shows the assumed units sizes and their sale prices based on a survey of recent sales extracted from Redfin, as described in the text above.
Lastly, the table below shows the FAR limits for the four building types allowed in Seattle’s low-rise zones, under existing zoning, and under the currently proposed MHA upzones. The change in FAR—the most fundamental determinant of the value of the upzone—varies substantially depending on both the zone and building type.
Comments are closed.