Boston-area developers have been able to find opportunities for large-scale multifamily projects in Gateway Cities such as Worcester, where V10 Development has begun construction of The Cove, a 7-story, 173-unit apartment complex near Union Station.

The adage across all commercial real estate during economic cooldowns is a financial flight to quality, which for Greater Boston multifamily housing means focusing on high-end apartment and condominium developments in the city. 

That might not be the case this time around. 

Gateway Cities – mid-sized cities across Massachusetts that fell on hard times but retain “unrealized potential” per MassINC – can be a development conundrum because these markets usually command lower rents that don’t provide a return on investment. This is especially the case in an environment where both interest rates and building materials are high.  

But some Gateway Cities appear to be primed for growth, especially if it becomes harder to make projects financially pencil out in Boston with Mayor Michelle Wu’s new proposals for rent stabilization and higher linkage fees. Suddenly the development grass looks a lot greener across city limits.  

“Some of the bigger institutional developers will probably start waking up to the Gateway Cities,” said John Tocco, managing partner and chief operating officer at V10 Development. “There’s a ton of potential not too far away from Boston. The market is still strong, and the land is cheaper. I’m not that worried about Gateway Cities.” 

V10 development recently broke ground on The Cove, a 7-story, 171-unit apartment development in Worcester overlooking Polar Park. The company is in pre-construction for Sky Everett, an approved 385-unit apartment tower on an urban infill site within Everett’s Commercial Triangle district. The development firm targets Gateway Cities with proximity or strong transit connectivity to Boston – something Everett and Worcester both offer. 

Some Cities Open Their Doors  

Other developers see similar opportunities in Gateway Cities such as Haverhill, Lawrence and Lowell.  

“When you’re a developer, you have to recognize the cost of construction, the cost of the land acquisition, and your return on cost. But also, is the town or the city going to be cooperative with you?” said Sal Lupoli, founder and CEO of Lupoli Cos. “You can create this speed to service, so we’re finding open arms in Gateway Cities.” 

This doesn’t mean things are entirely rosy on the development front. Higher interest rates mean it’s more expensive to borrow money in an already notoriously expensive construction market, making it even more difficult for a project to pencil out.  

Local developers interviewed for this story say that’s a problem all real estate markets face, and not just more affordable areas like Gateway Cities. A growing inventory of approved multifamily projects in Greater Boston await financing deals needed to move forward with construction. 

“It’s harder right now to get anything done anywhere, and it’s been for the last five or six years,” said Bryan Vitale, senior vice president of strategy and investments at Procopio Cos.  

The Boot Mills in Lowell. Challenging financing conditions everywhere have created a growing pipeline of projects that have been approved but are still lacking money to break ground.

Rent Growth Possible? 

Shifts in housing markets and work policies during the pandemic have benefited the Gateway Cities, as people found more living space in some markets outside Boston’s urban core. Now that there is more of a critical mass of residents than before, developer and investor interest is likely to remain. 

“It’s complicated right now across the board,” Vitale added. “You could actually make the argument that it’s a little bit easier, potentially, in Gateway Cities because when we’re looking at stuff and underwriting, you can justify rent growth in some of the Gateway Cities that you can’t really in the city because that stuff has started to dial back.” 

What’s the sweet spot? For Procopio Cos., it’s in the 75- to 150-unit range.  

“The current challenge is you have to make sure you’re sizing deals appropriately, because the issue is the large institutional deals just aren’t getting done,” Vitale said.  

As for financing a deal in this environment, creativity and existing relationships are critical. Those interviewed note smaller and medium-sized projects are still moving forward but typically from developers with existing relationships with smaller, local banks.  

Lupoli predicts that lending will open up further as developers get acclimated to a new normal.  

“I think people have been spoiled by the low interest rates we’ve had for so many years,” he added. “People just have to understand that just because interest rates have ticked up a little bit, you’re not going to stop construction. People need a place to live.”