With housing construction stalled across Boston, the Wu administration is thinking big when it comes to ways to get apartment and condominium projects moving again.
In particular, one idea city officials are exploring would involve a multi-year tax deal or abatement for new residential buildings that meet the city’s standards on housing affordability, which are poised to go up next year, according to industry and other sources familiar with the discussions.
One potential model is New York City’s recently expired “421-a” tax exemption program, named after its place in the New York state real estate law. Launched in 1971 and closed, revived and reworked several times since, the initiative is credited with spurring construction of 117,000 new condos and apartments across 3,000 properties over its most recent decade, according to research by New York University’s Furman Center.
In return for tax incentive deals, developers were required to lease or sell anywhere from 25 to 30 percent of their units at below-market rents and prices.
The program accounted for 70 percent of all new housing projects that opened in the Big Apple in the 2010s, according to a study last year by the New York University Furman Center.
Since the program ended, new rental building starts have plunged in New York City.
A spokesperson for the Boston Planning & Development Agency declined to comment on the idea.
However, we do know that Wu is indeed looking at some sort of tax break or tax incentive to spur new housing – she said so as much back in September.
Watch This Space
In a speech to the Greater Boston Chamber of Commerce, Wu revealed that the city was considering “a time-limited tax incentive program for housing creation” aimed at developments the city has already approved, but which hadn’t yet broken ground.
City officials, she noted, had “consulted leading experts and economists to evaluate our options for targeted investment in housing production at a time when new home construction remains incredibly difficult to finance.”
Wu then pledged to “sit down with stakeholders” in the coming months as “we finalize and think through the pieces of it.”
And like New York, Boston has seen a plunge in new housing starts across the board, which have fallen anywhere from 30 percent to 50 percent depending on whether you factor out new affordable and market-rate units being developed on the site of public housing projects in Charlestown and Jamaica Plain.
If Wu decides to take the plunge, then one logical venue for an announcement would be next month’s annual State of the City Speech, which mayors typically use to highlight big development initiatives.
And what would such a program look like? The New York model, which industry sources point to as an idea in play, calls for a tax exemption of three or more years during construction followed, after the building opens, by a multi-year phase-out of the incentive.
Politics Could Drive Time Limit
The tax exemption was particularly popular with New York developers but was phased out in 2022 amid criticism that it gave away too much tax revenue, a drawback that Wu would surely be sensitive to.
Such a criticism may be why the mayor has carefully couched any new incentive program as “time limited” – though clearly there is also a desire to get things moving as well.
That said, new residential construction in Boston is stuck in neutral amid a chronic housing shortage that has driven up rents and prices to extreme levels.
It is a fact that Wu, who is facing reelection less than two years from now, must be painfully aware of.
Meanwhile, the tax exemption the Wu administration is eyeing for new housing projects is separate from a previously announced tax incentive deal designed to spur conversion of older and half empty office buildings in downtown Boston, industry sources say.
There are likely to be only a limited number of new apartments and condos that will come out of that initiative given the difficulty of converting many office buildings, which have significantly different floor plates, to residential uses.
We are more than a year now into a real estate market downturn, with major developers in Boston and in many other cities now unable to get financing to move ahead with their projects thanks to high interest rates, skittish lenders and inflated construction costs.
If Wu does decide to move forward with a broader tax exemption program, it’s unlikely we will see a rapid return to boom times, though it could very well get a project or two moving.
But without a lifeline, it’s pretty clear that housing construction will continue to kick along at low levels until the real estate cycle finally moves into recovery mode again.
And your guess is as good as mine when that will be.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at firstname.lastname@example.org.