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CRE Leaders Worry Boston’s Fee Hikes Will ‘Throw Ice Water’ On Development, Push Investors Away

Leaders in Boston's commercial real estate industry are sounding the alarm over the planned increases to the city's linkage fees, a hike they worry could slow development and push investors away.

Last week, Mayor Michelle Wu proposed doubling the linkage fee for life sciences projects and increasing the fee for all other commercial developments by 50%. She also announced changes to the city’s Inclusionary Development Policy that would require developers of apartments to set aside more units as affordable.

The linkage fee increase, which still needs approval from the Boston Planning & Development Agency and the Zoning Commission, would come after former Mayor Marty Walsh hiked the fees by 42% in March 2021. The economic picture has worsened since then, and developers now face a series of new hurdles — from rising interest rates and construction costs to slowing demand — that experts say could make this latest increase have a much more negative impact on the city’s development.

If developers can’t make the financial math for projects work in Boston, experts said they will look elsewhere.

Alexandria Real Estate Equities' 15 Necco St. development, which will be the home of Eli Lilly's $700M research center.

“It's going to throw ice water on the housing industry,” said Greg Vasil, CEO of the Greater Boston Real Estate Board. “The timing of this is really concerning.”

Linkage fees, which commercial developers are required to pay toward affordable housing and job training funds, have been set at $15.39 per SF for all commercial developments of over 100K SF since Walsh’s increase. Wu’s proposal would increase the fees to $30.78 for lab space and to $23.09 for all other commercial projects. It would also lower the threshold for projects that have to pay these fees to 50K SF.

Vasil said he understands the city’s intent in making lab developments pay higher fees, given the life sciences boom that has occurred in recent years, but he said the move comes too late, as the industry’s growth has begun to slow.

In November, Newmark predicted that roughly 80% of the 40M SF of lab space that has been proposed but not broken ground on in the Greater Boston area could be put on hold, the Boston Globe reported. Boston proper had the greatest share of the region’s development that could be paused with 18.3M SF.

“I understand why they did this, because the lab and the biotech world has really been the golden goose in the last couple years in keeping the commercial market going,” Vasil said. “I think they missed the market. It’s not like it’s on the way up or plateaued, it's on the way down.”

Alexandria Real Estate Equities CEO Joel Marcus, whose firm has been one of the largest developers of life sciences space in the Boston area and around the country, told Bisnow in an email that these higher fees would make it “simply more burdensome to create new laboratory product.”

“Burdening businesses with higher fees and costs is never helpful because the costs ultimately burden companies in the industry seeking mission critical discovery of life saving cures and therapies,” Marcus wrote in the email.

He added that higher taxes in San Francisco, where Alexandria is headquartered, have pushed life sciences tenants away from that market.

Alexandria Real Estate Equities Chairman Joel Marcus

“We are just now relocating critical lab operations from one of our more than 1,000 client tenants to Texas from the city of San Francisco because of burdensome regulations and costs,” Marcus said.

NAIOP Massachusetts CEO Tamara Small said that coming out of the pandemic, lab projects brought billions of dollars into the city with big names like Vertex and Gingko Bioworks moving their headquarters into Boston. However, with costs rising, some developers might start migrating to cheaper cities and towns.

“Lab is really what saved Boston in many ways during Covid,” Small said. “If it becomes cost-prohibitive to build lab, it will be built elsewhere.”

The macroeconomic pressures developers face, such as rising interest rates and building costs, are largely out of their control and are felt in every market. But Vasil said when a city adds onto those pressures by increasing taxes and fees, it creates an “unfriendly development environment.”

"When it’s a choice of the government to add these policies and fulfill campaign promises, it creates an environment where people start to say 'Do I want to be here or not be here?'" Vasil said.

Small said she has heard much more concern from developers about Wu’s latest policy proposals, the linkage fee increases and the IDP changes, than she heard in 2021 when Walsh raised the linkage fees.

“[These proposals] have generated a strong reaction from developers in the market right now, because at the same time these announcements are coming out, there’s no question that development is facing some significant hurdles,” Small said.

It is not just developers who may look outside Boston for other options, Small said. Investors that help fund these projects and tenants that move into them have also been searching outside of Boston for cheaper, more accessible towns and cities.

Although some industry leaders worry the fee increases will slow development, those who are involved in affordable housing say they could help address the city’s dire need of more housing options for residents.

Vertex Pharmaceuticals has signed a lease for iSQ3, a 344K SF, seven-story building in the Seaport.

Joe Kriesberg, CEO of the Massachusetts Association of Community Development Corporations, said Wu’s proposals would help to create balance in an economy that had been dominated by lab development for the last couple of years.

“As a city, we want balanced growth. We want labs and life sciences, but we also want office, commercial and retail,” Kriesberg said. “One of things about these policies is that they are a tool to encourage that balance and growth."

MACDC represents community development groups across the state that are working to develop and preserve affordable housing. Some CDCs in Boston have found it hard to develop affordable housing due to high-profile lab developments pricing them out in certain areas, Kriesberg said. But these fee increases could change that dynamic.

“If a CDC is looking to buy a piece of property and they’re competing with a lab developer, because the CDC will be developing affordable housing they won’t have to pay the linkage fees,” Kriesberg said. “Therefore, it may give them a slight competitive advantage when it comes to the pricing because they won’t have that layer of cost.”

Boston isn't the only life sciences hub in the area that has begun imposing higher fees. Across the river, Cambridge enacted its own linkage fee hike in October. The Cambridge City Council approved a 66% increase, bringing the fee to $33.34 per SF for any new lab, office and other nonresidential projects of at least 30K SF.

This week, Watertown, another city with an emerging life sciences sector, got the green light from the state to begin creating its own linkage fee for nonresidential and nongovernmental development projects. Small said cities should be thinking more critically about how linkage fees affect the future of development.

“It’s a decision towns and cities are really going to have to think carefully about before they add on a cost because it could have the impact of stopping development,” Small said. “At such a delicate time for development and the economy, I certainly hope that it’s not the straw that breaks the camel’s back.”