| Rents have never been higher in Greater Boston, and vacancies have rarely been lower, yet it’s still hard for developers to make projects work. And that should worry everyone.
Even before one considers the tightening of lending criteria at the local banks that have been key sources of financing for most multifamily projects, the Federal Reserve’s interest rate increases made projects harder to finance. In a nutshell, these pushed up interest rates developers have to pay, raising a building’s operating costs. In turn, this has meant the developer must bring more of their own or of investors’ money – “equity” in industry parlance” – to the table instead of borrowing it.
Neither is of unlimited supply and, in the case of money brought in from outside investors, particularly from private equity firms, that typically comes with noticeably higher interest rates compared to a bank loan.
To understand why this has had such an outsized impact on housing production, you have to remember that Boston has one of the highest construction labor costs in the nation, and researchers at JLL estimate that it will continue to grow this year as wages catch up to inflation and competition from other blue-collar industries that don’t have the same arduous apprenticeship standards.
The demands on Boston-area construction companies’ time were also up by around 43 percent year-over-year in the first quarter, JLL’s most recent analysis shows. This means that, even as a decline in architectural billings across the region and building permits issued in Boston proper mean contractors will likely face some price pressures this year, they still have plenty of work to choose from.
Then, layer on new and more aggressive affordability requirements in Boston and its neighbors, which reduce a multifamily building’s cashflow and profits, and the ring of neighborhoods and towns where multifamily projects make financial sense at current interest rates shrinks.
Taken together, it becomes clear why even Yardi Matrix’s forecast for 2.8 percent growth in rents this year and 4.1 percent growth in 2024 – on top of already-high rents – and a for-sale housing market that’s pushing plenty of would-be buyers out and into luxury rentals still is creating barriers to housing supply.
What’s the takeaway for policymakers? Free or nearly-free land, as Boston Mayor Michelle Wu is pursuing, is an excellent start, but frankly won’t cut the mustard in every community. Instead, lawmakers need to consider ways to generate new funds that can be given away or leant out at very favorable terms to close these gaps in market-rate projects’ financing – at least until wages catch up to rents or contractors’ margins start getting squeezed a bit to create some headroom in developments’ pro formas.
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