Analysis of Residential Development Capacity in Spokane County. Prepared by Michael Luis & Associates

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1 Analysis of Residential Development Capacity in Spokane County Prepared by Michael Luis & Associates May, 2017

2 Introduction A central feature of Washington State s Growth Management Act is the idea of orderly and contiguous development. Under this principle, housing and commercial development is meant to move outward from the center of the urban area at a measured pace, avoiding leapfrog development that extends growth to peripheral areas before closer-in areas have developed. The primary tool to make this happen is urban growth lines that define urban growth areas (UGAs). Although existing plats outside the UGAs were grandfathered in when the first plans were drawn up in the early 1990s, most of those plats have been built out, and the great majority of the remaining land that can be developed at urban densities will be found inside the UGAs. Not long after the GMA was adopted, it became clear that some mechanism was needed to track the consumption of land within the UGAs that had been established, to ensure that enough land would be available for development to accommodate anticipated population growth. Thus, the Legislature created the Buildable Lands process in Recognizing that most growth in the state was taking place in a few urbanized areas, and also recognizing that this process would be very complex and expensive, the legislature required that it be undertaken by only six counties, all on the west side of the state: Clark, King, Kitsap, Pierce, Snohomish, Thurston. The buildable lands process, as carried out in the six counties, was quite elaborate and the reports indicated that there was ample land available for development. But the process contains a significant weakness, in that it does not take into account dynamics underway in the marketplace. Land that is indicated as developable according the buildable lands process may not be feasible to develop from a market perspective during the planning horizon. Furthermore, the GMA and the buildable lands process make no distinction between zoning and housing types, although these distinctions are extremely important in the marketplace. Thus, in the view of many in the housing industry, the buildable lands process overestimates the development capacity of much of the state. Although the formal buildable lands process only applies to six counties, other counties, including Spokane County, knew that they needed to track the consumption of land as well. Other GMA counties, outside of the six Western Washington counties, undertook less complicated versions of the buildable lands process, using the basic principles of the state-mandated process. Spokane County created its land quantity analysis (LQA) process and made it part of the Countywide Planning Policies that govern growth planning for the county and all cities in the county. This report focuses on the LQA process carried out in Spokane County in the past few years. The purpose is to assess the degree to which the LQA process covers the many variables that determine the supply of developable land, and to assess whether that supply will be adequate to meet the housing needs of Spokane County over the next 20 years. Thus, there are two main components to be examined: land supply and projected population growth. Analysis of Residential Development Capacity in Spokane County Page 2

3 Because of the availability of data and the timing of plan updates, the analysis that follows will focus on just the four largest jurisdictions: Spokane County, City of Spokane, City of Spokane Valley, City of Liberty Lake. These four jurisdictions account for about 85 percent of the population allocation that is meant to be accommodated within urban growth areas (about 20 percent of countywide growth is expected to occur in rural areas outside the UGAs). Land Quantity Analysis process in Spokane County Figure 1 shows the process that is undertaken by each of the jurisdictions in Spokane County. Each of these steps may not be undertaken formally, but the results are reflected in the final data. 1. Land area by zoning type. The jurisdiction s GIS database is queried to identify three kinds of parcels. Vacant parcels have no existing use and are ready to build on or be further subdivided and developed. Partially used land has some use (generally a single house) but has ample extra land that can be developed to accommodate additional homes. Vested land is vacant land that has a formal plat application pending, such that the final capacity of that land is known. As part of this process, planners may include some assumptions about the way parcels will likely be used. For example, a parcel that has the equivalent capacity for two homes may be assumed not to ever be subdivided and be assigned just one unit. Parcels zoned multifamily but with single family homes may not be counted as capacity if it seems unlikely that the home will be torn down to build apartments. 2. Adjust for critical areas. In many cases critical areas are known and mapped, and these areas, along with their buffers, can be removed from the capacity figures. Jurisdictions that believe they have Analysis of Residential Development Capacity in Spokane County Page 3

4 unmapped critical areas can simply cut up to 10 percent from their gross capacity to account for those unknown areas. 3. Adjust for roads, parks etc. For parcels that will be developed into formal subdivisions, 20 percent can be deducted to provide for public uses. This step is not necessary when dealing with vacant building lots located in existing subdivisions or urbanized areas where public uses are already in place. 4. Total developable land. The result of the two adjustments to the gross land area is the total amount of land that is theoretically developable. 5. Apply market factor. Although land may be flat, dry and vacant, the owners of that land might not want to sell it to anyone during the planning period. It may be a long term investment, it may be family property that no one wants to part with, it may be have an agricultural or other use or the owners may just like the idea of owning it. Whatever the reason, it cannot be assumed that all land will be for sale, or for sale at a price that make sense for development. The Buildable Lands Process and Spokane County s LQA allow for a deduction of land that will not be available. The size of this deduction is not spelled out, and little effort has ever been made to determine just what it should be. Most jurisdictions around the state use a figure in the 15 to 20 percent range. Spokane County uses a figure of 30 percent, which is high by state standards. This figure has been challenged, and the county and cities anticipate performing research to arrive at a figure that can be justified. But in the meantime, all jurisdictions are applying a 30 percent market factor. 6. Net developable land. All the deductions and adjustments yield a measure of net developable land. This is the amount of land that should be able to accommodate housing during the planning period. 7. Apply zoning and people per household. The land quantity now is translated into people. First, parcels are given a unit capacity based on their underlying zoning. Each unit is then assigned a population, based on an average of 2.5 people per single family unit, and 1.5 people per multifamily unit year population growth capacity. The result of the previous step is a total population growth capacity for the jurisdiction. 9. Forecast and allocation by jurisdiction. The state Office of Financial Management issues a countywide forecast, indicating the number of people that must be accommodated in the county over a 30 year period. The jurisdictions in the county divide that forecasted population among themselves and allocate it to individual jurisdictions (the county gets an allocation for both the rural areas and the UGAs in unincorporated areas). The jurisdiction must have capacity for the number of people so allocated. 10. Adequacy of land supply. The capacity in step 8 is compared to the allocation in step 9 to determine if the jurisdiction has adequate capacity to meet its forecasted growth. Analysis of Residential Development Capacity in Spokane County Page 4

5 This process, with some variations, has been undertaken in recent years by all the major jurisdictions in the county. Spokane County and City of Spokane Valley completed their LQA analysis in early The cities of Spokane and Liberty Lake completed their analyses in 2015, and the City of Airway Heights will complete their update in LQA results for four jurisdictions Figure 2 shows the results of the most recent LQA for the four largest jurisdictions in Spokane County. Again, the figures for the county only refer to the land in unincorporated areas within UGAs. Population allocation, in the second column from the right, is based on the mid-range projections from OFM (questions about which will be raised below). One of the major differences between the formal Buildable Lands process undertaken by the six Western Washington counties and the Land Quantity Analysis undertaken in Spokane County is that the Spokane process stops short of aggregating all of the data on capacities into a countywide picture. The LQA is intended primarily to determine if each jurisdiction has capacity to accommodate the population that it is allocated, but there is no summing up to determine if the total capacity in the county is equal to the total population expected to arrive in a 20 year planning horizon. Figure 2 does this. Figure 2 shows that, according to the process required in the Countywide Planning Policies, there is enough capacity in Spokane County to accommodate the population allocated to the four largest jurisdictions (again, about 85 percent of the total UGA allocation). Spokane Valley has the thinnest surplus, but there is capacity for nearly 10,000 people in the unincorporated UGAs adjacent to Spokane Valley that could be annexed in the future. Single family and multifamily housing Another peculiar feature of the GMA and the land measurement process is that it makes no distinction among housing types. As will be discussed next, demand for single family housing and multi-family housing is distinct and relatively fixed, but the GMA assumes that people will live in whatever kind of Analysis of Residential Development Capacity in Spokane County Page 5

6 unit is provided. Figure 3 breaks out the capacity estimates by single family and multi-family, but like countywide aggregation, this is not part of the official LQA process. While the LQA process breaks out capacity by single family and multi-family zones for purposes of determining population capacity (2.5 people per single family unit, 1.5 per multifamily unit), it combines that capacity when considering the total allocation. But because there is a clear distinction in the market between single family and multifamily housing, we need to break out the population allocation and see if there is enough single family capacity to meet anticipated demand for detached housing. An underlying current of the GMA is the idea that more households will choose to live in multifamily housing in the future. There is, however, scant evidence that an increased preference for living in apartments and condominiums constitutes an identifiable social trend. Theories about a higher than average preference for multifamily housing among Baby Boomers and Millennials have been shown to have little merit. And while the GMA may anticipate a higher share of the population living in apartments and condominiums, it provides little in the way of incentives for households to change their preferences. After 25 years of GMA planning and three distinct housing cycles, the results are clear: the preference for single family housing has not changed anywhere in the state. In the Puget Sound region, where such a shift would have been most visible first, the share of single family housing today is exactly the same as in Multifamily housing takes up a slightly larger share of the housing stock, but that is due to the stagnation or shrinking of the manufactured housing stock. Figure 4 shows the distribution of housing types countywide and in the City of Spokane for 1990 and 2016, indicating no real change in the preference for single family housing. Spokane Valley and Liberty Lake were not incorporated in 1990, but their 2016 ratios are similar to the rest of the county. Also shown is the statewide share for single family in This pattern is repeated almost exactly across the Analysis of Residential Development Capacity in Spokane County Page 6

7 state and over the same time period, and there is no reason to believe it will change any time in the foreseeable future. Therefore, for a land quantity analysis to have real meaning, it must distinguish between zoning types and housing types. Figure 5 shows the degree to which each of the four jurisdictions can meet it s the requirements for single family housing that would be needed by the allocated 20 year population growth. The column single family required assumes that two thirds of the new housing units would be single family, with an average of 2.5 people per household. This requirement is based on the same midrange population growth numbers used in Figure 2. Figure 5 indicates that, countywide, there is adequate capacity in single family zones to meet the need for detached housing for the 20-year period. Spokane Valley has the thinnest surplus, but as noted above, capacity exists in the adjacent unincorporated UGAs to accommodate households that wish to live in that general area, and these areas could be annexed in the future. Figure 5 does, however, reduce the theoretical surplus of capacity indicated in Figure 2, which is based on population, not housing unit type. According to Figure 2, the total of the cities and UGAs provides 186 percent of the needed capacity, but when looking at Figure 5, these areas have 179 percent of the single family capacity required. And as will be discussed below, a number of factors not considered in the LQA process will further reduce that surplus. Analysis of Residential Development Capacity in Spokane County Page 7

8 Parcel size and ownership A second detail not covered in the LQA is parcel size and ownership: developing a 20 acre farm into a formal subdivision is quite different from carving out a three-lot shortplat in the middle of the city. Spokane County, the City of Spokane and the City of Spokane Valley provided detailed listings of parcels shown as vacant or partially used, along with size, assumed capacity (units and population) and ownership. The following details are taken from those lists. In general, the larger the parcel, the more economical to work with, as per-unit costs drop with an increase in scale. Many soft costs (permitting, legal, market research) are relatively fixed and can be spread over more units. Construction mobilization costs tend to be fixed and contractors will be more attracted to bid on larger projects. Volume purchasing of materials can also reduce construction costs. Therefore, parcel size and capacity will have an impact on the developability of property, as will be discussed further below. Figure 6 breaks out the vacant and partially used parcels in the three jurisdictions by their unit capacity. Several things of note are seen in this table. First, 16.7 percent of the total unit capacity in the three jurisdictions is in single-unit parcels. Some of these are simply unbuilt lots in subdivisions that will very likely find buyers and builders. But others are oddments scattered around the area that will struggle to attract development due to the high cost of building one-off homes. A clue to understanding how many of these single parcels might be easily developed is seen in the column on the far right. This shows the percent of the single-unit parcels owned in groups of four or more. An individual or company that owns multiple single lots is more likely to build on them or to be in a position to market those lots to individuals or builders. Lots in group ownership are much more likely to be in close proximity, and a sampling of these lots confirms that. Ownership of large groups of lots is much more prevalent in the unincorporated UGAs, where two thirds of the single parcels are owned in larger groups. Over 60 percent of the single unit lots in the City of Spokane and 80 percent in Spokane Valley are owned in groups of three or fewer, and it will be a challenge to attract buyers and builders for them. Analysis of Residential Development Capacity in Spokane County Page 8

9 A second thing to note is the small share of parcels with a capacity of over 20 units, 80 percent of which are found in the unincorporated UGAs. The parcels of over 20-unit capacity in the cities of Spokane and Spokane Valley have a total single family capacity of just 1820 units. Market factor As noted in the above discussion about the LQA process, the final deduction applied to the gross land area is known as the market factor. This is a recognition that not all land will be available for purchase during the planning period. Land might not be available for purchase for any number of reasons. Reasons that land would not be available mostly fall into one of two categories. Investment. The imposition of urban growth boundaries by definition creates artificial scarcity. There is a defined amount of land within the UGAs, and as the recent litigation over UGAs attests, the state and private parties are keeping a close eye on that amount of land to make sure it is not too large. While it is impossible to say that there will always be growth in the Spokane area, there is no reason to believe that it will grow substantially less than it historically has, so holding onto the scarce resource of developable land can be a good long-term investment. This will be the case particularly in attractive areas that are developing with higher priced homes. 20 years may seem like a long time period during which a landowners mind might change, but it is well within the horizon of many people s investment planning. Investment in land also extends to those in the building industry. For those land developers and homebuilders who can afford to tie up cash in land, they can assure themselves and their business successors a long term supply of land by buying and holding it. So while land held by developers will eventually turn into neighborhoods, that process will not necessarily be driven by the pace of market demand, but rather by the pace at which the owners wish to operate. Personal values. Much of the land within Spokane s urban growth areas is only a generation or two removed from agricultural uses, and it is not unusual for families to retain ownership of a parcel that has been with them for one hundred years or more. Those uses may be long past, but there is sentimental value in the land and if legacy issues make it possible, family members may not wish to part with it. Analysis of Residential Development Capacity in Spokane County Page 9

10 No one questions the need to apply a market factor to buildable land inventories, but there is disagreement about how big a deduction should be taken. Only one jurisdiction, Snohomish County, has ever attempted a rigorous survey of land owners, but even the results of that study may not apply well in areas with different market conditions. Market factors used around the state vary mostly between 15 and 30 percent, meaning that the inventory assumes that between 70 and 85 percent of the development capacity will be available to purchase within the planning period. As noted, Spokane County and some cities are planning to undertake a survey of landowners to get a better sense of their willingness to sell. It will be important that this process not treat willingness to sell as a Yes-No question, but one with answers that will vary depending on price. The real question is not whether an owner will be willing to sell, but whether they will be willing to sell at a price that a developer or builder can afford to pay and produce a finished lot at the right price. Economic Feasibility Land that is within the UGA, zoned for residential uses and has a willing seller may not be economically feasible to develop. The homebuilding business is highly competitive and builders are very cost constrained in what they can spend to build homes. The Spokane market, while robust, does not feature high incomes that will support large amounts of expensive housing. Most builders aim for price points that are affordable to the households around the median income of $50,000, which is lower than the statewide median of over $60,000. The economics of homebuilding pivots around the cost of a finished building lot. A finished lot has a recorded legal description, an address, a road and sidewalk in front of it and all of the necessary utilities stubbed out at the edge of the property. The land is cleared, level and ready for excavation of foundations and undergrounding of utilities to the structure itself. In most jurisdictions, impact fees will have been paid during the lot development process. A critical metric for homebuilders is the contributory lot value, which is the portion of the market value of the completed home accounted for by the cost of the finished lot. The building industry, and, perhaps more importantly, their bankers, operate from standard assumptions about contributory lot value. For many years, the industry considered 25 percent to be about right. That is, a $30,000 lot would have a home built on it selling for $120,000. With rising land and development costs, the standard has increased and now is closer to 33 percent in high cost areas. The critical point is that, whatever the standard for contributory lot value in a market, builders are held to that standard by their lenders. It is considered poor business practice to build less expensive homes than the lot value calls for, and banks will not issue construction loans for homes that do not meet the lender s standards for contributory lot value. (Note: this constraint applies not only to homebuilders who purchase finished lots from land developers, but also to homebuilders who start with raw land and develop the lots themselves. In the latter case, lenders will often treat the land development process and the homebuilding process as two distinct stages and finance each stage independently.) Analysis of Residential Development Capacity in Spokane County Page 10

11 Therefore, when a homebuilder targets a price point for a home, they are also targeting the price for the lot they will build it on. If land is too expensive to develop, or results in lot prices that are not in line with home prices for that market area, that land will sit fallow. Many of the factors that affect the feasibility of development have been discussed above briefly and are elaborated on here. Parcel size and capacity. As noted above, homebuilding enjoys substantial economies of scale. The entire process involves fixed costs that are spread among units, and the more units they can be spread among, the lower the cost per unit. Homebuilders themselves have fixed costs, such as permit application and tracking, market research, legal fees, and project oversight. The process of construction itself, both the development of lots and the construction of homes, involves many separate subcontractors, each of which has fixed costs that will get passed on to the homebuilder as part of their bid. These costs include preparation of the bid itself, mobilization on the site, drawing up bills of materials and working with suppliers. The fewer units among which to spread costs, the higher the cost per unit. Project quality can also suffer with smaller unit counts. More experienced and capable subcontractors have more choice in projects they will take on, potentially leaving smaller projects to less experienced contractors. Parcel configuration and access The dimensions of a parcel dictate the ways it can be developed. The lots themselves need to have dimensions that will accommodate a house and an appropriate yard. Often the more critical issue is access. On small parcels, especially narrow ones, the access road takes up good deal of space. Developers prefer to have homes on both sides of a road, spreading the cost of the road, and the underground utilities that run beneath it, over twice as many units as a road with homes only on one side. On very narrow parcels this is often not possible, increasing per-unit road and utility costs by up to a factor of two. Many of the infill parcels in the Spokane area, especially in Spokane Valley, are quite narrow, making access to the rear of the parcel difficult or impossible. In many cases there are two or more of these lots adjacent to one another, introducing the possibility of assembly, but that depends on willing sellers, as discussed in the Market Factor section above. To illustrate this challenge, Figure 7 shows several parcels in Spokane Valley that are counted as partially used in the city s LQA. A and B are individually owned, and C has the same owner as the parcel below it on the street. All parcels are zoned R-3, which is the least restrictive single family zoning in the city. Parcel A is.85 acres and is assigned a capacity of 2.5 units. Parcel B is slightly larger and assigned 2.7 units. Parcel C is just over a half acre and assigned 1.8 units. Analysis of Residential Development Capacity in Spokane County Page 11

12 Figure 7 Each of these parcels is 75 feet wide, so creating a 30-foot right of way along one side results in one or two lots that would by just 45 feet wide. Now, the development standards for this zone allow for front and rear setbacks of just 15 feet and 10 feet, respectively, but that would still leave a building footprint of just 20 feet in depth. A narrower, 20 foot right of way would result in a 30-foot depth for the home, but even that would be a design challenge. Moreover, a 10-foot rear yard would present a marketing challenge. In some areas it is possible to use a narrower driveway, rather than a full road, but the resulting lots would still feel crowded and awkwardly configured for homes and yards. Market fit It is an old maxim in real estate to avoid owning the most expensive home in the neighborhood. But that is exactly what would happen in many instances of infill development on small parcels. If the parcels in Figure 7 were to be developed, the result would be brand new homes that are worth far more than the homes in the area. The older homes adjacent to parcels A, B and C have an assessed structure value of $100,000 to $125,000, whereas newer homes in the area have structures valued at $150,000 to $200,000 (assessed land values will be similar). A well-constructed development of 10 or 12 homes clustered around a cul-de-sac can create its own feel as a newer neighborhood and buyers will feel they are not moving into an older area, even if the surroundings are older. But two or three new homes strung together on a narrow parcel would struggle to create that same new-community feel. Given the higher costs of building on narrow lots (more road Analysis of Residential Development Capacity in Spokane County Page 12

13 and utility footage per home) it would be hard to make a sound development business out of parcels such as those in Figure 7. Consolidation of parcels is certainly an answer, but that depends on the willingness of owners to sell at the same time. The small developers and builders who might be attracted to projects of this scale would not likely want to tie up their capital in one parcel while they wait for the neighbor to decide to sell. Timing is everything. Geology The state mandated Buildable Lands process, from which Spokane County takes its LQA process, allows for reductions in land due to sensitive areas such as wetlands and steep slopes. But this deduction for natural features does not take into account a reality that Spokane uniquely faces: rock. The GMA was drafted with the western half of the state in mind, and most of the urbanized areas west of the Cascades have glacial soils that are hard, stable and relatively easy to work with. Much of Spokane is built on solid rock, which, while stable, is not easy to work with. Excavation of a rocky site is extremely expensive and disruptive. While it may be possible to build on rock, underground utilities must be blasted out. Areas with a substantial base of rock do not percolate water well, requiring stormwater to be moved far offsite. In the discussion below about the economics of developing lots, the dependent variable is the price that a developer will pay for land: the higher the development cost, the lower the price paid for raw land. It is conceivable that rocky land would have a negative value development costs are more than the lot is worth. Unlike sensitive areas, rocky land can be built on, but often at such a high cost that doing so is economically infeasible. Local governments should have the option of deducting geologically unsuitable land from their inventory of buildable land and adding equivalent buildable land to the UGAs. Illustration of feasibility issues To see some of the challenges of working with infill parcels, consider the two development plans shown in Figure 8. This example is taken from actual parcels in Spokane Valley that are shown as partially used and having development capacity. The development cost figures are taken from an actual recent development in the Spokane area of similar density. Development 1 consists of two existing tax lots, one very narrow, that are currently in common ownership. The size of the combined lots is just over one acre, and with the R-3 zoning, can accommodate six units, with a minimum lot size of 5,000 square feet. The Spokane Valley LQA data, with the deductions discussed earlier, attributes 3 units to the site. Access to the rear of the site requires a driveway down one side, with six lots along the driveway and the cul-de-sac. Analysis of Residential Development Capacity in Spokane County Page 13

14 Figure 8 Development feet wide, 311 feet deep acres Development feet wide, 311 feet deep. 1.7 acres Next to the parcels shown in Development 1 is another parcel that is not considered developable in the LQA because it is under one acre and has a usable home. But if a developer were to acquire it, demolish the home and combine it with the other two parcels, a site of 1.7 acres would be created for Development 2. This site would fit ten lots around a driveway in the middle. Figure 9 shows the economics of developing these two projects. Note that some costs are the same for both projects, including mobilization and the stormwater system. The water/sewer systems have the same spine, so the only reductions come from the number of individual connections. The smaller project would need the same curb and gutter, but sidewalk only on one side. The road is slightly smaller in the smaller project. Engineering costs would be close, since most of those costs involve infrastructure which is similar in both projects. The difference in the price that a developer would charge for each lot--$10,640-- may not seem like a great deal of money, but the principle of contributory lot value, discussed above, means that the target price on the finished homes would be between $32,000 and $42,000 higher on the smaller project. Analysis of Residential Development Capacity in Spokane County Page 14

15 Now consider the configuration of the site. The smaller project has an open side, and the developer cannot control what happens on the adjacent parcel. All of the homes, except perhaps lot No. 2, would look out onto that site, and it might not be the best view. Buyers might be wary of investing in a home that could have an inappropriate use across from the front porch. With the larger project, the homes surround the driveway, and even though they may face something undesirable out their back windows, they do get more of a neighborhood feel being clustered around the drive. The smaller project would have a lot price of nearly $60,000, suggesting a home price in the neighborhood of $180,000 to $240,000. These prices would be consistent with sales in that neighborhood, but they also would mean a pretty thin profit for the builder and not a lot of money to cover overhead. Small scale and low prices make for a tough business. Analysis of Residential Development Capacity in Spokane County Page 15

16 The smaller project could be made more feasible by paying less for land. If a developer only paid $60,000 for the land in Project 1, the resulting lot price would be equal to that in Project 2. But an owner might be reluctant to part with a good sized parcel for that little money. Implications of feasibility issues The four issues raised here parcel size, parcel configuration, market fit and geology are well known challenges to developing infill sites, in addition to the general problem of operating in constrained spaces. Although the jurisdictions undertaking the LQA process have been conservative at times in assessing how much development capacity these small parcels really have, the process is not set up to address these market-driven issues. The reality is that some portion of the land counted as developable in the LQA will turn out to be infeasible for homebuilders to work with during the 20-year planning horizon. The only way it will become attractive to builders is if they can either acquire the land for a very low cost or charge substantially more for the homes they build on those parcels. And either way, developer would need to assemble multiple parcels to create the kinds of scale economies they depend on. Some landowners may sell parcels for very little, but most will try to hold out for what they see as the typical price paid for residential land. Few landowners want to be told that their parcel is so difficult to develop that they must discount it heavily in order to sell. The long, skinny lot with a house will likely just get sold as a long, skinny lot with a house. For homebuilders to get much higher prices would signal a general increase in home values that the Spokane area economy is unlikely to be able to support. Infill homes need to be priced similarly to other, existing homes in the neighborhood, so while some parts of the Spokane area may be able to support higher priced infill, most areas will not. While the LQA process that is embedded in the countywide planning policies does not allow for deductions for these kinds of feasibility questions, policymakers should be aware that the surpluses shown in Figure 2 and Figure 5 may not be quite as comforting as they seem. Population projections The preceding discussion addressed concerns about the supply of land. But the flip side of the adequacy question is the demand for housing. The demand shown in Figure 2 is taken from the mid-range population projections provided by the state Office of Financial Management. A look through the OFM methodology raises important questions about whether that mid-range projection is the right target. Two sources of growth Population growth comes from two main sources: natural growth and net in-migration. Natural growth is measured as births minus deaths. From a housing demand perspective, this measure is not straightforward, since babies do not need houses and many people leave their homes well before death. Natural growth is relatively stable, with ups and downs like the Baby Boom, the Baby Bust (Generation X), the Baby Boom Echo (the Millennials) and now that the Millennials are having children, Analysis of Residential Development Capacity in Spokane County Page 16

17 the Echo-of-the-Echo. With time lags, each of these waves produces demand for housing. After a slowdown in demand from the smaller, Generation X, the Millennials are now getting to an age for family formation, and demanding more single family housing. Statewide, natural growth has accounted for about 44 percent of growth since The natural population growth rate is influenced by the underlying structure of the population. As age skews younger, fertility will be higher and deaths fewer. The median age in the state ranges from 55 in Jefferson County to 29 in Franklin County, with Spokane County s median age is just slightly younger than the state average of 37. The younger populations of the Central Washington Counties, and the generally larger family sizes of the large Hispanic populations resident in those counties, give them higher natural population growth rates. The four counties with the highest natural population growth rates are all in Central Washington. Spokane County s natural population growth rate is somewhat lower than the state average. The crude birth rate in Spokane County (births as a share of total population) is about the same or slightly lower than the state average. Spokane County s crude death rate is, however notably higher than the state average. This is likely due to the fact that Spokane s over-35 population skews much older than the state average that is, fewer adults between 30 and 55, and more over 60. Spokane County s natural population growth rate may be a bit low, but it is much higher than the natural growth rates in most of rural Eastern Washington, where birth rates are very low. The second source of growth is net in-migration, defined as the number of people moving into an area minus the number of people moving out. Since World War II, national migration patterns have tended to follow two trends. First, there has been a long term trend of people moving away from rural areas and into cities, and away from the middle part of the country toward the coastal states and the Sunbelt. Second, migration follows fluctuations in economic opportunity, with net flows moving toward places with more dynamic economies and job prospects. These trends have favored migration to Washington, with the second trend leading to much volatility. Since 1960, net migration has contributed about 56 percent to statewide growth. Spokane county has mostly followed the state pattern since 1960, but with somewhat less growth coming from net in-migration over that time. Net in-migration has varied from a net outflow of almost 4,400 people in 1963 to a net inflow of over 8,000 people in 1979.Since 1960, natural growth has accounted for 57 percent of Spokane County s growth, with net in-migration accounting for 43 percent of growth. But in-migration has picked up more recently: since 2000, net in-migration has accounted for 60 percent of Spokane County s population growth. OFM statewide projections When OFM creates its population forecasts it looks at each of the two components of population growth and attempts to see where trends are headed. OFM demographers take what they describe as a top-down procedure that starts with projections of state population and then creates county projections from there. OFM provides three projections, low, mid-range and high, and each county s Analysis of Residential Development Capacity in Spokane County Page 17

18 GMA plans must accommodate growth within that range. The LQA analysis done by jurisdictions in Spokane County uses the mid-range projection, and the following discussion is based on the mid-range. OFM s most recent GMA projections, County Growth Management Population Projections by Age and Sex: , was issued in August This set of projections assumes much lower statewide growth than previously projected. The report states: Compared to the state forecast used in the 2007 Growth Management Act (GMA) county population projections, the November 2011 forecast projects lower population growth between 2010 and 2040, delaying the 2007 expectations by approximately five years. This decline is the result of the severe recession that occurred after the 2007 GMA release and subsequent adjustments made to the fertility, mortality and migration assumptions in response to recessionary impacts on population growth patterns. OFM forecasters saw the sharp drop in net in-migration that occurred as a result of the Great Recession (a national phenomenon fewer people moved anywhere, given the difficulty of selling homes and finding employment) and extrapolated that trend into the future. As a result, their forecast for netmigration into the state is lower for the period than the historical trend. Net in-migration to the state was 1.45 million in the 30 years from 1980 to 2010, and OFM is projecting net in-migration of just 1.2 million from 2010 to 2040, an 18 percent drop. The forecast document offers no compelling rationale for this projected drop, other than to state that there was less migration during the Great Recession. We are now five years into this projection, and can see how accurate it has been. OFM projected that from 2010 to 2015 net in-migration to the state would be about 105,000. Actual net in-migration during that period, as reported by OFM itself, was over 153,000, resulting in a projection error of 46 percent. For the period 2015 to 2020, OFM projected net in-migration of 42,000 people per year. Actual net inmigration for the first year of that period was over 87,000, for an error of 107 percent. (OFM was much closer in projecting natural population growth for the period, underestimating it by just 2 percent.) More recent data from the Department of Licensing (DOL) shows that driver s license applications from out-of-state drivers for the 12 months ending February, 2017 stood at about 200,000. This rate has held steady for about a year, and contrasts with a previous peak of about 165,000 in Since DOL does not have an accurate count of Washington drivers surrendering their licenses in other states, we cannot compare this to net-migration data, but the trend is clear: record numbers of people are moving to the state. Both the OFM population estimates and the DOL data point to a serious underestimation of net inmigration to the state in the 2012 forecast report. And since OFM derives county projections from state projections, this error will find its way down to the county level. OFM updates its statewide population growth forecast annually, and the most recent version, for 2016, does acknowledge the uptick in migration since 2012, and anticipates that will peak in 2016 and taper Analysis of Residential Development Capacity in Spokane County Page 18

19 down to the originally-forecasted low levels by OFM maintains its projection of long term, belowhistoric population growth in the state. Errors in projections of net in-migration have an impact on natural population growth rates. The typical migrant who moves from one state to another is young, single and college educated the sort of person who will likely start a family after moving to the state. And young people starting families is the primary source of demand for single family housing. OFM projections for Spokane County Just as OFM provided lower estimates of population growth for the state, it provided lower-than-historic projections of growth for Spokane County. Figure 10 shows historic growth and the mid-range projection for growth, in five-year increments, for Spokane County. In the 30 years from 1980 to 2010, the county added about 130,000 people, for a 38 percent increase in population and an average annual growth rate of about 1.1 percent. The OFM mid-range forecast for 2010 to 2040 anticipates adding about 122,000 people, for a 26 percent increase, and an average annual growth rate of 0.79 percent. Figure 11 shows several ways to project the population of Spokane County going forward. The top row shows the mid-range projections from OFM, as employed by the LQA process in Spokane County (with slightly different year ranges). The second line is the high projection from OFM s 2012 forecast. The third line shows straight-line growth based on the 30-year average growth rate of Spokane County from 1980 to The fourth line shows straight-line growth based on the Spokane County growth rate from 1990 to 2010, skipping the slow growth years of the 1980s. The growth rate based on the 30-year average results in population change that is 50 percent higher than the OFM mid-range. Using the faster, 20-year growth rate results in population growth that would be nearly double the OFM projection. The OFM high projection yields more growth than either of the historic figures. Analysis of Residential Development Capacity in Spokane County Page 19

20 Even though OFM updates its statewide population projections annually, it does not issue new county forecasts at the same time. So new findings of statewide population trends do not have any impact on the projections that Spokane County uses for its GMA work and the LQA analysis. The population allocations worked out among the jurisdictions in the county, and used to measure the adequacy of land, cover the 20-year period between 2017 and 2037, but are based on the mid-range growth rates projected in the 2012 process (average annual growth rate of 0.79 percent). OFM has indicated that, at least for the period those projections were low, but they continue to be used at the county level. The OFM 2016 population forecast update report contains a key statement that ought to raise some concerns in Spokane County and elsewhere in the state. In explaining why it continues to project low net migration to the state beyond 2020, OFM states: With the state reaching full employment and the rising cost of living, inflows are likely to decrease and outflows increase, but this will happen gradually. Over the next 5 years, net migration is predicted to increase by an additional 84,100 persons compared to the previous forecast. The state s long-term migration assumption of 48,700 remains the same as last year. This does not make sense. Full employment is mostly a feature of the secondary economy, with the primary economy operating within national labor markets and on its own employment patterns. As firms like Amazon continue to grow, they will draw workers from around the world, and those workers will generate demand for workers in the secondary economy (teachers, store clerks, nurses, homebuilders etc.). It is not at all logical to assume that a condition of full employment will reduce inmigration. While OFM bases its county projections on its state projections, there is little reason to believe that Spokane County will operate in tandem with the other metro areas of the state. Its economy is distinct, and has its own set of drivers. OFM s population projection models are based on economic models that Analysis of Residential Development Capacity in Spokane County Page 20

21 look at the growth of specific industries and sectors. Using this idea at the county level, a look at prominent employment sectors in the county should provide clues about future growth. In Spokane County it is useful to concentrate on the healthcare sector, which has been growing rapidly as Spokane becomes a major center of health services for a large part of the Inland Empire. Healthcare employment in Spokane County is 60 percent higher than the statewide average, and the Washington State Department of Employment Security projects that health services employment will grow over 2 percent per year in the coming decade. With two medical schools in Spokane, this sector is poised to take off, and that will drive population growth across the entire service sector. As the 2015 to 2020 period begins, growth in Spokane County is off to a strong start. In March, 2017 the U.S. Census Bureau released its population and migration estimates for 2015 to Out of 90 metropolitan areas in the country with more than 500,000 people, Spokane had the 13 th highest rate of net migration, at 1.45 percent, or a net gain of over 7,600 people. This put Spokane one place below Seattle, which gained 1.46 percent of its population from net migration. The OFM mid-range projections are based on a set of conjectures about future economic and demographic behavior that do not appear to be consistent with historic experience or identifiable trends. This inconsistency could present difficulties as buildable land supplies tighten. Implications of population projections for adequacy of land supply We can use the various projections in Figure 11 to arrive at demand for single family housing. Figure 12 shows the capacity for single family homes based on the LQA for each of the four jurisdictions in the left column. Then, for each of the growth rates in Figure 11, it shows how much single family housing would be required to meet those projections, and how that theoretical demand stacks up against capacity. Figure 12 shows that the unincorporated UGAs can meet the county s allocations under any of the growth projections. Liberty Lake can meet its allocations under any but the OFM high projection. Spokane and Spokane Valley, on the other hand, can only meet their allocations under the OFM midrange growth projection (the one used in the current LQA analysis) and would fall short in capacity Analysis of Residential Development Capacity in Spokane County Page 21

22 under the higher growth rates. Combined, the four jurisdictions would meet their allocations under the OFM mid-range and the 30-year historic growth rate, but not under the OFM high or the 20-year historic rate. Impact of capacity and growth concerns Figure 12 raises questions about the ability of the jurisdictions in Spokane County to accommodate single family housing demand under growth scenarios that are closer to historic patterns than the OFM mid-range projections. But the capacity numbers in Figure 12 are taken from the LQA analysis and do not reflect the concerns raised about development feasibility in the previous section of this report. Without significant further research it is not possible to quantify the concerns about development feasibility with any great accuracy. Land markets and development practices are flexible enough that it would be difficult to determine the impact of the four issues raised parcel size, parcel configuration, market fit, geology on the supply of properly zoned land that is feasible to develop. But for the sake of discussion, assume that 10 percent of the capacity indicated in the LQA were found to be totally infeasible. Figure 13 shows the impact of that assumption on single family housing under the 30-year historic growth rate. Under this scenario, the four jurisdictions have 110 percent of their needed capacity barely enough to meet projected demand. Figure 2 shows a relatively optimistic picture of the availability of land for housing. But when considering the economic and physical feasibility challenges of developing much of the land shown in the LQA inventory, and considering the strong possibility that OFM mid-range population projections are underestimating future growth, the picture changes. Under some very plausible assumptions about feasibility and growth, the surplus pretty much disappears. Analysis of Residential Development Capacity in Spokane County Page 22