iStock illustration

Call it the Big Stall.

Tens of thousands of proposed new housing units have gone unbuilt in the city of Boston even though they’ve already received necessary approvals and permits.

In particular, Mayor Michelle Wu’s administration has come under fire for allegedly making it too difficult and expensive to build new multifamily projects in Boston.

But many other multifamily building plans across Greater Boston are also going unbuilt, despite having won necessary local approvals, and despite strong multifamily market fundamentals such as low apartment vacancy rates and high rents.

What’s going on?

According to local industry experts and developers, the problem is rather simple, but not easily solvable: financing.

Specifically, they say the fundamental advantages of today’s multifamily housing market in the Boston area are all there – a housing supply shortage, high rental demand, low vacancy rates and strong lease prices in most areas of the region.

But higher interest rates and skyrocketing construction prices continue to offset those advantages, making it harder to line up affordable financing with banks and private investors for new building projects.

The net result: a slowdown in multifamily construction at a time when one might think construction should be picking up.

“It’s become very difficult to make the numbers work,” said Biria St. John, vice chairman at CBRE in Boston, referring to multifamily building projects. “The margins are so thin today. We see tremendous demand for [new multifamily housing]. But the economics have to work – and they’re not working.”

Tight Margins Delay Two Projects

Two proposed multifamily projects by V10 Development – one in Everett and the other in Boston’s Dorchester neighborhood – illustrate just how hard it is today to build both in and outside of Boston.

V10’s Sky Everett apartment tower, with its planned 396 apartment units and various amenities, has already won necessary approvals from Everett officials. Meanwhile, V10’s proposed 50-unit apartment development at 257 Washington St. in Dorchester has also received the necessary approvals to proceed.

Yet both projects are stalled, stuck in pre-construction limbo until V10 can find acceptable financial terms that will make it feasible for the firm to finally break ground in Everett and Dorchester.

“The margins are just too tight,” says John Tocco, managing partner at V10 Development. “Interest rates and construction prices are killers.”

Rick Beliveau, chief financial officer at V10, said there’s little doubt that the Wu administration’s increase to 20 percent in projects’ affordability components and energy code changes have made financing of projects more difficult in Boston.

But multifamily housing’s financial challenges, both in the city and suburbs, still come down to today’s higher interest rates and sky-high construction costs,

“It’s not just [the city of] Boston,” Beliveau said of the overall slowdown in housing development. “The cost of building in Greater Boston has just gotten so high.”

Remnants of Previous Era Under Construction

To be sure, there are indeed multifamily projects currently under way across Greater Boston.

But they’re often developments whose financing terms were lined up a few years ago, when interest rates were lower and construction prices hadn’t yet reached today’s historic highs.

Many of the projects now under construction also received some sort of public assistance that has helped defray costs, such as Marcus Partners’s 304-unit 582 Kelly development in North Attleboro.

That project, which broke ground earlier this year, received debt backing from TD Bank and equity investment via the Prudential Group, said Levi Reilly, a partner and head of development at Marcus Partners. But it also received key public grants to help offset various infrastructure costs, he said.

To obtain financing, “we had to thread the needle,” said Reilly. “It probably wouldn’t have worked without the [state and local] support.”

Boston’s per-unit housing development costs are the fourth-highest among a similar group of pricey coastal metros, according to an analysis by the city’s Housing Innovation Lab. Image courtesy of Boston Housing Innovation Lab

Overall interest rates – including those for construction loans – have more than doubled since late 2022, when the Fed started raising rates in an attempt to tame rising inflation. That’s helped send the cost of borrowing up significantly over the past five years.

Meanwhile, as a result of COVID and supply-chain constraints associated with the pandemic, prices for construction materials began to soar five years ago. Recent tariff-related price gyrations have only added to all the construction-price woes, officials say.

According to a recent report by the city of Boston’s Housing Innovation Lab, construction material costs have risen by about 73 percent over the past five years, contributing to the spike in multifamily construction prices to about $550,000 per unit in Boston.

That’s one of the highest per-unit construction costs in the country.

Banks, Investors Toughened Terms

But making matters worse is that banks and private investors have also toughened their terms for construction loans and equity investments, respectively, executives say.

They may see the same attractive market fundamentals for multifamily ventures, such as the high demand for apartments, low vacancy rates and strong rental rates.

“There’s plenty of financing out there, particularly for sales [of multifamily properties],” said CBRE’s St. John. “The multifamily fundamentals are so strong.”

But investments and loans for sales are one thing. Investments and loans for construction projects are a different matter.

Banks and private investors see more risks in construction – and they’re demanding more from developers to reduce those risks.

As for banks, they’ve previously been willing to provide construction loans covering 65 to 75 percent of the total costs of projects, said V10’s Beliveau.

But today most banks are willing to provide loans covering only 50 to 60 percent of total costs.

“That leaves a lot more equity that needs to be raised,” said Beliveau. “It requires you to bring more equity to the table.”

Meanwhile, potential equity partners, such as private equity firms, are demanding more from developers due to the perceived higher risks tied to new construction.

Compared to five years ago, equity partners today are demanding far more favorable terms for themselves, such as a 6.5 percent fixed return on costs, some officials say.

Investment partners are also increasingly asking for preferred positions on finance deals, making sure they’re first in line to receive any future payments or distributions.

That’s made it harder to find secondary equity partners who may not like playing second fiddle to other investors, officials say.

“It’s putting too much risk on the developers,” V10’s Tocco said of both banks and investors’ financial conditions today. “The structure of deals has shifted in recent years.”

Approved in 2023, the Dorchester Bay City project would include 2,000 housing units on a 36-acre site at Columbia Point. Image courtesy of Stantec

Hope for Rate Cut, Government Help

Andrew Kaeyer, executive vice president at Hunneman, said the finance picture has been complicated by recent consolidations within the banking industry – mergers that have created a “little bit of a pause” in some construction lending.

But he stressed higher interest rates and construction prices are the real drivers of today’s slowdown in multifamily housing development.

“There’s a lot of projects that are kind of on a holding pattern,” he said.

To break the development logjam, a drop in interest rates alone would be a big help, he said.

“It could make a make a world of difference” for some projects, he said. “It doesn’t need to be a dramatic downward movement in rates.”

Other steps could help projects get off the ground – such as government assistance.

Kaeyer noted construction of the new 26-unit Isobel Lofts project in downtown Lowell recently got underway after financing was secured via both public and private sources, such as the Massachusetts Housing Development Incentive Program (HDIP), the Lowell Development and Financial Corp. (LDFC), Cahoon Capital and Lowell Five Bank.

Hunneman worked to facilitate financing on behalf of Nine Zero Two Development, which is developing the Lowell project.

“It eased some of the financial burdens on the project,” Kaeyer said of the public tax-credit support for Isobel Lofts. “It’s all about making the economics work.”