Housing developers received leeway from state lawmakers to break ground on projects that face expiring permitting dates, but macroeconomic conditions and regulations continue to weigh heavily on the industry. iStock photo

A two-year permit extension throws multifamily developers a lifeline – but no silver bullet to overcome still-high obstacles to housing projects breaking ground.

A nearly $4 billion economic development measure Gov. Maura Healey signed in November includes a provision aimed at helping developers find more time to secure financing and move ahead with projects.

But experts in the multifamily space say it likely still isn’t enough on its own to nudge proposals over the starting line anytime soon.

The economic development bill includes a provision that allows a two-year extension on any project approved between the start of 2023 and the end of this year. The rationale behind the measure: It buys developers more time to hopefully move forward on projects that don’t pencil out today amid interest rate hikes in recent years and soaring construction costs.

New Challenges Arose

The recent decision echoes a similar measure approved by lawmakers following the Great Recession.

Trade organizations including the Home Builders & Remodelers Association of Massachusetts and NAIOP Massachusetts, a commercial real estate development group, heralded the permit extension measure as a win for the Massachusetts real estate sector.

But there is also sentiment in the local development and finance industries that, after a recent string of rate cuts and speculation that inflation isn’t coming down as quickly as expected earlier this year, the Federal Reserve may not be as aggressive in further quantitative easing in the new year.

That means stalled projects could need more time to make fiscal sense, especially if construction costs aren’t cooling off, either.

“The Fed rate cuts are only positively affecting short-term interest rates, so not construction loans,” Fergal Woods, managing partner at real estate capital advisory firm Finance Boston, said in an email. “Long-term rates have been going up since the [Fed] started cutting rates. So, we need long-term rates to go down to help make stalled projects work. I don’t think that will happen in 2025 unless there is more [quantitative easing, which] is a possibility.”

Despite inflation easing earlier this year, residential construction costs remained sticky. The annual price jump for residential construction in June was the highest seen since February 2023. Material costs soared with lumber, steel and aluminum along with imported materials and equipment, according to the National Association of Homebuilders.

Construction consultancy firm Rider Levett Bucknall notes Boston’s 5.87 percent increase in construction costs in the third quarter of this year from a year ago is above the 4.91 percent national average.

Building Code Changes Pile on Costs

The 10th edition of the Massachusetts Building Code is scheduled to take effect in June 2025, adding a series of updated requirements for new construction that will affect project costs.

Michael Procopio, CEO of Middleton-based developer The Procopio Companies, said the changes will add costs to developers looking to pursue new multifamily projects.

“That’s a very substantive code change,” Procopio said while estimating the new building code could add as much as $15,000 per unit in multifamily development costs. “So, a project that already made very little sense financially now is going to make less sense financially, not only the cost to redraw it and re-permit it, but actually now to build it under a more expensive code.”

Additions to the new state building code could add as much as $15,000 per unit in multifamily development costs for projects that break ground in the next two years, one prominent developer estimates. iStock photo

The changes undercut the benefits of the permit extension, along with expectations that interest rates need to decline further to make construction costs more tolerable.

“In the short term, no, [the two-year permit extension is] not going to make any difference whatsoever,” Procopio said. “It’s just going to keep some projects that are on the shelf, on the shelf, instead of being thrown in the trash.”

As for what can move the needle on multifamily creation in Greater Boston, Procopio emphasized the need for construction costs to come down along with interest rates. The one-two punch of both rising can partially explain why so many local developers have turned to the Sun Belt.

Cost per-unit for The Procopio Companies to build out a current multifamily project in Marlborough was just shy of $400,000, compared to $220,000 in Orlando, Procopio said.

“The rents [in Orlando] are lower, but they’re not half,” he said. “The construction costs are half [of those in Massachusetts], and the rents are off by 20 percent. That’s a better deal.”

Procopio and Finance Boston’s Woods are still optimistic about Greater Boston, and Procopio especially sees plenty of opportunity in the suburbs. Further, Woods noted the pipeline of multifamily deals is flowing despite the headwinds.

“You must factor in that a lot of the regional banks are managing their balance sheet and are not aggressively lending even for projects that do pencil out,” Woods said. “That being said, we’re getting transactions closed, it’s just that they require a lot of creativity and hard work.”