A “rare opportunity” on Capitol Hill will transform a just-finished apartment building planned for upscale market-rate rentals into affordable housing for people who are currently homeless.
The developer of the 76-unit Clay apartments plans to sell the building to the Low Income Housing Institute (LIHI) for about $18.2 million, said LIHI Director Sharon Lee. LIHI expects to house 75 people, including 20 homeless veterans, Lee said.
The sale, expected to close next month, is an unusual deal in Seattle’s once-hot apartment market.
The seven-story building at East Howell Street and Belmont Avenue was advertised as “perfectly tailored for city living.” Inside are studio apartments of less than 300 square feet. A rooftop deck offers views of downtown.
“If ever there was a beating heart of Seattle, Clay sits right in the middle of it,” reads the promotional copy on the building’s website.
Demand has fallen for newer in-city apartment buildings, a trend marked by landlords offering deals like free months of rent. Rents are down in some areas and eviction moratoriums remain in place. Some renters are seeking more space or no longer striving to be close to bars, restaurants and office buildings; some are moving farther from the city to save money.
On Capitol Hill, rents have dropped for the first time since at least 2011. Rents for new leases on Capitol Hill are down about 7% compared to a year ago, according to data from CoStar. (The same trend has played out in other Seattle neighborhoods, while rents are up outside the city.)
That can make once-lucrative Seattle developments riskier bets for private developers looking to turn a profit—and create new openings for affordable housing.
“There’s a class of buildings where folks say: OK, this was a great business line but we’re not sure about the future. We would like to get out,” said Debbie Burkart, national vice president for supportive housing at the National Equity Fund, a nonprofit affordable housing investor that will provide LIHI a loan for the Capitol Hill building.
“That creates an opportunity on the flip side for public-private partnerships … A building like this shouldn’t just be bought and held and kept empty until the market turns around,” Burkart said.
Representatives for the Clay apartments developer, Blueprint Capital, did not respond to calls seeking comment. The Daily Journal of Commerce first reported on the expected sale.
LIHI expects to buy the building using short-term bridge loans from the Office of Housing, Washington State Housing Finance Commission and the National Equity Fund, Lee said. An additional $2 million will cover closing costs, fees and other expenses. The city will provide the largest loan, of $11.3 million.
Emily Alvarado, head of the city’s Office of Housing, called the sale a “rare opportunity.”
The city “heard the seller was interested in offloading the building” and connected the developer to nonprofit organizations, she said.
While property owners sometimes made similar offers before the pandemic, Alvarado said her office has seen an uptick in interest from building owners or developers looking to sell.
The city can’t buy every building that might be available, but “we’re a stronger player in the negotiations” because of the cooler market, Alvarado said.
Still, affordable housing funders say it’s too early to know just how widespread such sell-offs might be. For now, the deal at the Clay apartments is unique, they said.
Once LIHI takes ownership of the building, people with incomes of 30% to 40% of area median income — less than about $31,000 for an individual — will qualify to live in the apartments. Residents will pay 30% of their income in rent.
The apartments are designed to be permanent housing, rather than temporary or transitional shelter, Lee said. A property manager will live on site, two case managers will be assigned to the building, and the building will have overnight security. An unfinished first-floor space will become offices for case managers, a kitchen and a computer lab for residents.
The sale will cost LIHI roughly $240,000 per apartment. Building a similar development from scratch could have cost $325,000 a unit, Lee estimated.
Even as the market shifts, some private developers are still betting on small apartments.
Rents for small studios and one- and two-bedroom apartments owned by developer NexGen Housing Partners have dropped 10% to 15% compared to a year ago, said CEO Daniel Stoner. About 10% of the apartments are vacant, compared to 4% or 5% pre-pandemic, Stoner said.
Last year, Stoner contacted the city about possibly selling one building near Othello Station, but the city couldn’t offer a high enough purchase price, he said.
Stoner said he expects to continue developing small apartments, probably with more outdoor gathering spaces because of pandemic social distancing. For firms that construct buildings and plan to hold onto them, “we can ride it out,” Stoner said. “For those who build and flip, they’re in a much more tenuous position.”
Brad Padden, a developer whose firm Housing Diversity Corp. built micro-apartment projects across Capitol Hill and First Hill, saw a similar trend. Rents for new leases in his company’s buildings are down about 15% compared to before the pandemic, he said.
“But our whole business model is built around the lack of affordability for middle-wage incomes,” Padden said. “This idea that people are going to be able to just go live in bigger houses and spread out—that’s just not financially feasible for most people.”