Boston Tackling Affordability

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As Boston Nears Affordability 'Breaking Point,' Leaders Struggle To Turn Pledges Into Units

Years of talk about building affordable housing in Boston hasn't led to much actual production of apartments. While state and local officials are moving toward legislation designed to kick-start more building, experts warn more inaction could jeopardize Boston's standing as one of the country's bastions of economic growth.

As Boston Nears Affordability 'Breaking Point,' Leaders Struggle To Turn Pledges Into Units
Boston's land constraints and increased demand have made it one of the most-expensive places in the world to live.

Leaders, lenders and developers have batted around ideas and introduced housing initiatives for years while Boston’s rents and home prices soar and the region sits as the seventh-most-expensive city in the world to live, according to a Bloomberg analysis.

A March Federal Reserve Bank of Boston report showed the region is severely undersupplied for housing for low-income earners. Boston needs more than 140,000 affordable units added to the market to accommodate demand and prevent lower-income earners from being burdened by rent, which is spending roughly anywhere north of a third of one’s income on a place to live.

Boston’s Inclusionary Development Policy mandates 13% of units in multifamily developments with 10 or more units be designated as affordable housing with lower rents.

The program has only added 2,600 affordable units to Boston’s housing stock since its founding in 2000. Many of those units are set at rents that, while below market rate, are still out of reach for those earning minimum wage or close to it.

Developers also have the option to create off-site affordable units or pay into the city’s fund for creating and maintaining affordable housing if they decide they don't want to include affordable units in their luxury properties.

Developers argue density and height — not affordable housing legislation and market-rate building requirements — are the answer in a space-constrained city like Boston. Zoning reform will unlock an affordable housing solution that has been impeded by decades of downzoning, building advocates say.

Lenders say Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development are doing everything they can to offer cheaper debt and favorable rates to spur more affordable projects.

But for all the affordable housing chatter, there hasn’t been a real alarm bell for Boston as to what might happen if the city doesn’t take seriously the growing gulf between the demand for, and supply of, affordable housing.

New construction cranes keep going up, more companies keep moving to the city and, after decades of panic that Boston was losing its homegrown pool of highly educated talent, the region is gaining talent rather than losing it to Silicon Valley.

Experts warn that the status quo is on thin ice.

“Honestly, we’re approaching a breaking point. Right now, there’s no tremendous incentive for developers to pursue affordable housing,” Berkadia Senior Director Gemma Geldmacher said. “It’s a little bit of cognitive dissonance hearing how we need affordable housing but seeing how our economy has not been hampered by the loss of it.”

Lack Of Affordable Housing Already Costs Cities Big Business

As Boston Nears Affordability 'Breaking Point,' Leaders Struggle To Turn Pledges Into Units
Population trends show people are leaving costly gateway markets in favor of affordable cities like Nashville (pictured) and Austin. Companies are following suit.

Boston may be growing, but other places in the country are growing faster, and experts like Geldmacher say it is driven by affordability. While pricey gateway markets like New York City and Los Angeles lost population in 2018, affordable Sun Belt markets posted gains, according to a recent CBRE report.

Dallas added 132,000 people in 2018, and Phoenix gained 96,000 residents. It is expected to supplant Boston as the 10th-largest U.S. metropolitan area in the next year. Austin grew by 53,000 people last year. Nashville has grown by 100 people a day in recent years.

Boston leaders have reason to be concerned with higher growth in markets that offer similar economies, rooted in higher education, healthcare and technology, at a lower cost of living.

Apple announced at the end of 2018 plans for a $1B Austin campus, and Amazon is moving forward with a 5,000-employee operations center in Nashville it announced alongside its HQ2 decision.

Amazon’s request for proposals for HQ2 applicants said a region’s affordability would be a factor in the final decision, although it ultimately chose New York City and Washington, D.C., for a split headquarters, two of Boston's pricey peers.

Boston leaders pursued Amazon and Apple, but only won smaller offices compared to the two cities to the south.

Affordability-driven outward migration isn’t just a Boston concern. The CBRE report highlighted how Los Angeles’ population loss was a gain for California’s Inland Empire and Phoenix. A 2018 Redfin report showed the Bay Area led the U.S. for outward migration. The top destination for Bay Area migrants was Sacramento, where the average home price was roughly a third of San Francisco’s.

Leaders and developers in Boston know generating more affordable units in the region could stop people and businesses from skipping Boston in favor of more affordable places to live and operate.

“There’s no magic bullet to solve the affordable housing problem all at once. It’s going to be a combination of smaller initiatives,” Mount Vernon Co. Chairman and founder Bruce Percelay said. “It is a problem, and any developer who doesn’t think it’s important to provide affordable housing in the city doesn’t get it.”

Legislating Out Of A Problem

As Boston Nears Affordability 'Breaking Point,' Leaders Struggle To Turn Pledges Into Units
Boston Mayor Martin Walsh has a 15-bill affordable housing plan that includes raising Boston's inclusionary development rate on market-rate projects.

Gov. Charlie Baker’s Act to Promote Housing Choices bill calls for statewide zoning reform to lead to the creation of 135,000 new units of housing by 2025.

Zoning changes currently require a two-thirds majority to pass, and Baker’s bill, if passed, would require a simple majority for local zoning changes. The move could enable more density to move forward more quickly.

That could assist the consortium of Greater Boston mayors who want their municipalities to collectively create 185,000 new housing units by 2030. Boston alone wants to create 69,000 in that time frame.

Boston Mayor Martin Walsh wants to raise the IDP rate from 13% to 18% to spur more affordable housing as part of a 15-bill legislative plan to tackle affordability. Even suburban cities like Salem are pursuing inclusionary development alongside zoning changes to encourage more density along transit lines and in downtown areas.

“I’m cautiously optimistic,” said Vanessa Calderón-Rosado, CEO of nonprofit community development organization Inquilinos Boricuas en Acción (Puerto Rican Tenants in Action). “Probably not all the bills at the State House will go through, but given there’s so much activity and everyone is working with a sense of urgency, I think we’ll come out of this legislative session with something on the books.”

Calderón-Rosado welcomes all ideas to solve the affordable housing problem. IBA developed Villa Victoria, a 435-unit affordable housing complex in the South End, after a grassroots movement halted a push for urban renewal in the neighborhood in the 1960s.

The organization has since expanded its affordable mission elsewhere in the city, but Calderón-Rosado said it is only possible thanks to government resources giving IBA the ability to build more units.

“Until private developers come up with a strong strategy, both the government and organizations like IBA welcome ideas,” she added. “It’s all of us together. It shouldn’t just be on private developers, the government or nonprofits. It’s all hands on deck.”

Optimism Alive Even In The Eye Of Sky-High Building Costs

As Boston Nears Affordability 'Breaking Point,' Leaders Struggle To Turn Pledges Into Units
Mount Vernon Co. Chairman and founder Bruce Percelay (right) thinks there are ways to boost affordable housing production without raising inclusionary development rates on private developers.

Even all the hands working to make Boston more affordable aren’t producing the numbers needed to make a Boston home or apartment easier on the wallet. The median price of homes sold in Boston in the last year is $635K, according to Zillow. In Nashville, it is just over $270K. Austin’s median home value is about $370K.

Boston’s inclusionary zoning policy created 546 affordable units in 2018, one-fifth of all the units created since the program’s founding in 2000. Along with the units, developers have contributed $137.1M to the IDP fund for the preservation and creation of affordable housing.

Local building economics are particularly hard to overcome. Labor in the heavily unionized city is expensive, and construction costs can increase as much as 12% in a single year, Geldmacher said. A single residential unit can cost as much as $450K for a developer to build out.

The cost realities have made it even harder to point to a future of widespread affordable housing production, so more stones are being unturned in the hopes of getting closer.

Percelay, whose company has recently focused on entry-level workforce housing developments along Allston’s Western Avenue corridor, thinks zoning changes to allow developers to build out more basement units in existing buildings could unlock thousands of new units of housing.

Height-averse (and water-locked) Boston also needs to allow greater height and density to residential buildings, as the scarcity of developable land is limiting supply and keeping costs high, he added.

Former Boston City Council President and commercial real estate attorney Larry DiCara thinks another way the city can increase production is to create affordable housing for healthy seniors too young for assisted living, then upzone their freed-up, single-family dwellings with denser development.

It could be the Boston version of Minneapolis 2040, a plan that eliminated single-family zoning and encouraged density around transit corridors and the urban core in Minnesota's biggest city.

“You could free up a lot of housing and unclog the pipeline if you had a place for people to go, but there’s no program to build stuff for people,” DiCara said. “It’s very difficult for a private developer to come up with a solution unless there’s a program to make it work.”

As Boston Nears Affordability 'Breaking Point,' Leaders Struggle To Turn Pledges Into Units
Cranes over the Seaport signal Boston's economic strength, but critics argue more needs to be done to build units easier on the wallet than what is going up in Boston's waterfront neighborhood.

Walsh still thinks there is a way to raise the IDP rate and not scare off development teams. He announced the 18% proposal after previously introducing his “housing security and economic mobility” legislative package earlier in the year to make Boston more inclusive and equitable. Along with the inclusionary development component, the Walsh plan calls for protection of senior housing.

Developers have complained about Somerville’s 20% inclusionary zoning rate as too high, but Walsh said at an April Bisnow event of his 18% plan that “not everyone was happy, but not everyone was mad.”

Housing advocates have praised the plan for striking an even tone between revenue and tenant protections.

Salem is exploring options when it comes to inclusionary zoning as well as the potential to use municipal-owned land for affordable housing projects. The North Shore city’s officials have run focus groups and interviews with developers to find a middle ground on housing mandates that won’t scare off developers.

“We have been looking at the inclusionary development rates closely, because turning away development is the last thing we want,” Salem Senior Planner Amanda Chiancola said.

On the lending side of the equation, Geldmacher works with Fannie Mae, Freddie Mac and HUD. The three leaders in affordable housing finance are making debt cheaper, reducing spreads and increasing the amortization period on loans, all of which incentivize developers to produce more housing.

While it may seem like there is more chatter and fewer results in Boston’s affordable housing space, Geldmacher remains cautiously optimistic.

“Everyone has a piece of the stack and cost they contribute. As an industry, we need the best and brightest on every single line item doing what they can to reduce pricing and increase the accessibility of their piece of the stack,” she said. “Eventually, all the talk around affordable housing will pay off."