Boston Mayor Michelle Wu was flanked by giant video screens broadcasting live video of her as she delivered her annual State of the City speech at MGM Music Hall next to Boston's Fenway Park on Jan. 9, 2024. Photo by James Sanna | Banker and Tradesman staff

Last week, as Boston Mayor Michelle Wu was stepping back from a proposal to kickstart stalled housing projects across the city, a very different scene was unfolding in the Empire State.

As Wu put a hold on plans to dole out tax deals to beleaguered housing developers, New York State Gov. Kathy Hochul announced she was pushing ahead with efforts to revive a long-time state tax break designed to spur construction of new apartments and condominiums.

In fact, the program Hochul wants to revive, the 421-a tax break, had been studied by the Wu administration as a possible model as it tried to get to grips with a dramatic falloff in housing construction amid the sharp increase in interest rates and the surge in construction costs.

More than 117,000 housing units were built in New York City during the 2010s with help from the tax abatement program before it was cancelled in 2022 amid pushback from critics over lost tax revenue.

Combined with the big jump in interest rates and construction costs, the program’s demise led to a dramatic, 50 percent drop housing development in New York.

The cost of launching such a tax deal program in Boston is clearly a concern as well for Wu.

While city officials estimate nearly 7,800 already-approved market-rate units might benefit from any tax incentive, the financing gaps these projects face under current market conditions are simply too great, she told reporters after her State of the City address Tuesday night, for the city to bridge.

Vulnerable from the Left

Under the most optimistic scenario, contemplated by Boston officials, the city would forgo an estimated $326.1 million in property taxes in order to get 1,077 new housing units built.

In New York, progressives were the most vociferous critics of that state’s own program, complaining that it didn’t produce enough truly affordable units and was just a huge giveaway to developers.

It wouldn’t be illogical to think that Wu might be concerned about facing similar backtalk from some of her most avid supporters if she were to push ahead with a Boston version of this program. After all, she is most likely gearing up for a reelection campaign.

That said, it’s not over until it’s over. And while Wu’s decision not to move forward at this time disappointed housing developers with projects stalled on the drawing boards, there is also a belief in industry circles that a potential tax abatement deal remains a “work in progress,” as one local developer put it.

A spokesperson for Wu delivered a similar message as well.

“On tax abatements specifically, the administration looked to examine every possible mechanism and is currently keeping all options on the table for relief as we continue our analysis,” Ricardo Patrón, the mayor’s press secretary, said in an email.

Wu Didn’t Shut the Door

For her part, Wu also noted that the city would be keeping an eye on interest rates, with the idea that city might move ahead with the program if the financing gap were to narrow.

Scott Van Voorhis

While there is certainly some anticipation that Federal Reserve policymakers may look to lower their benchmark interest rate multiple times later this year, there is also no guarantee when they will, or if they’ll do it at all. And the cumulative size of those rate cuts – say, by a full percentage point – is not likely to make that much of a difference in getting stalled projects moving again, noted one developer.

At the end of the day, the mayor will have to make a decision on whether it is worth taking the risk of forgoing potentially hundreds of millions in tax revenue in order to get at least some housing construction moving again in Boston.

The alternative could very well be a bleak two or even three years ahead, with little new, market-rate housing getting built in Boston, even as rents and home prices continue to edge up past their already historic highs thanks to the city’s strong economic foundation and decades of underbuilding region-wide.

And while the city might have to forgo tens or even hundreds of million in taxes, most of these projects likely still end up paying some taxes and contributing millions of dollars in taxes the city would otherwise have not collected were no housing built.

For Wu, the pressure to do something is likely only to mount as the extent of the housing bust becomes even more glaringly apparent.

Stay tuned.

Scott Van Voorhis is Banker & Tradesman’s columnist and publisher of the Contrarian Boston newsletter; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.