Greg Feldman

The cost of housing is an urgent issue facing citizens across Massachusetts. Housing – shelter, to be anthropological – sits on the first rung of Maslow’s Hierarchy of Needs, alongside air, food and clothing.

Given its critical nature, it would be hard to find anyone – real estate developers and investors included – who disagrees with the notion that all people deserve a place to live.

Yet, for years, the burden to produce and fund housing for all income levels has been wrongly directed at developers. Public officials, lacking immediate solutions, consistently cast this responsibility onto the private sector.

When housing developers push back, they are characterized as just being greedy and indifferent to the needs of lower-income households. But that characterization misses the point entirely. The friction around creating affordable housing isn’t about moral intent; it’s about business fundamentals.

The Hard Floor of Construction

In the equation of housing construction, there is a “hard floor” of fixed, unavoidable minimums.

Like a shop owner, as the costs of labor and materials increase, so does the price for the consumer.

In 2015, the average cost to physically construct a home was approximately $289,415. By 2024, that figure jumped to $428,215, a 48 percent increase in nearly a decade.

Apartment construction has seen even sharper spikes, with per-unit costs in many tier-one markets climbing 40 percent in just five years.

The Silent Partner: The Bank

Real estate is a debt-driven business, and a developer must meet certain criteria to qualify for a commercial loan.

A notable metric is the debt service coverage ratio, the cushion between the net operating income and the annual cost of debt.

For example, if the cost of a loan is $1 per year, then the net operating income needs to be $1.25. If that spread doesn’t exist, the bank will not finance the project.

When interest rates rise, increasing the cost of the debt, more revenue (rent) is needed to satisfy that test. Put simply: even if a developer decided to develop housing for no profit, they would never get the deal financed.

Beyond these hurdles, the entire endeavor is extraordinarily risky. This can mean total financial ruin for the developer, who must personally guarantee the loan, risking their home and savings.

This level of exposure is rarely required in other high-stakes professions.

In private equity or investment banking, a partner who backs a failed fund loses their investment. A developer who backs a failed project can lose everything they own.

The Supermarket Paradox

To understand the rarity of asking developers to subsidize non-market rate units, look at another of Maslow’s Hierarchy of Needs: food. Is it the responsibility of supermarket companies to subsidize the SNAP  “food stamps” program? Of course not. Supermarkets sell groceries at market prices, and the government helps those less fortunate make up the difference.

In the business of housing, that is the case for deeply affordable housing. In both the federal Section 8 and Massachusetts Rental Voucher programs, the government provides a stipend to bridge the gap. However, the burden of funding anything between Section 8 and market rate has fallen squarely on the developer, typically via municipal “inclusionary zoning” requirements.

Imagine a grocery store where milk is $10 for some and $2 for others based on income level. That is essentially what is happening in housing.

The developer’s job is to solve the supply and distribution problem, not the affordability problem.

If we examine the other essential needs of society, we find no comparable burden placed on private industry like that of housing. Clothing retailers, automakers and pharmaceutical companies face no such mandate.

This burden isn’t even applied consistently within real estate itself. Office developers are not asked to provide “affordable” rents to less profitable companies. A landlord leasing retail faces no requirement to discount space for “mom and pop” stores versus national chains, yet residential developers face exactly that mandate.

Real Solutions vs. Band-Aids

When political pressure peaks, cities often turn to rent control. Though it might offer some immediate, visible relief to current renters, most economists argue that rent control doesn’t solve the underlying crisis, often making it worse in the long-term by reducing housing supply.

While several logistical solutions exist – zoning relief, increased density or expedited permitting – they all ultimately fall short of solving the underlying economic issue.

Like the SNAP program, the reality is the public sector needs to finance or subsidize affordable units through direct payments or grants, with tax breaks being one straightforward pathway.

Ultimately, lowering the cost of housing is like losing weight. The answer is simple; the execution is hard: Build more units and publicly subsidize affordable rents. It’s time we followed through on the hard but simple truth.

Greg Feldman is the founder of Drishti Development and the former senior vice president at Boston-based Feldco Development.