In Boston, Federal And Civic Partnerships With Developers Are The Keys To Solving The Affordable Housing Crisis
Like many cities across the U.S., Boston is in the middle of an affordable housing crisis.
Driven by increased demand and the city’s continued growth as a major urban center for jobs and education, the price of living is on the rise. The Boston Home Price Index increased 118% between 2000 and 2018. Renters have also not fared well, flooding the market as many people choose to rent over owning homes.
To combat the dwindling inventory, Mayor Martin Walsh created the Boston 2030 plan, which outlines the city's goal to deliver 69,000 units of housing by 2030. But some real estate investors wonder if that increase will be enough.
“One of the great things about Boston, but also one of its detriments, is that it is a victim of its own success,” KeyBank Senior Vice President Dirk Falardeau said. “We are definitely attracting world-class talent because of our engineering, technology and education centers. But it is growing at a precipitous pace.”
Falardeau, who has spent eight years with KeyBank, specializes in affordable housing and market-rate housing loans. One of the biggest challenges to affordable housing preservation and development has been the steep barriers to entry for developers in the Boston Metropolitan Area. The city is the only state capital in the mainland U.S. that borders an ocean, limiting growth to the east. Infrastructure such as adequate public transportation also impacts where projects can be placed.
Boston can’t sprawl, and that puts land costs at a premium, comprising between 10% and 15% of total development cost. Combined with construction costs that average $233/SF, it is becoming harder for deals to pencil out.
To obtain their requisite return on investment, developers have favored luxury high-rise construction over affordable housing preservation or construction, Falardeau said. In response, rents have risen, with the average rent in Greater Boston reaching $2,187 in Q2 2018, up more than 4% compared to Q2 2017, the Boston Globe reported. Multifamily vacancy rates also remain below 4%, according to a Fannie Mae Q3 report.
While luxury activity benefits the influx of wealthy educated professionals flocking to Boston for jobs, the limited affordable supply continues to put pressure on longtime residents below those income brackets.
One solution has been for city officials to partner with private developers on projects, Falardeau said. The city offers incentives like tax breaks and the ability to build market-rate housing in previously inaccessible areas in exchange for affordable unit preservation. This type of public-private partnership has been the driving force behind the proposed Bunker Hill public housing redevelopment in Charlestown. The plans call for the over 1,100 units in the existing 13-block housing project to be replaced with modern units, in addition to market-rate apartments, Curbed reported.
The developers, Corcoran and Leggat McCall, have partnered with the Boston Housing Authority on the affordable housing project. Work would start in 2021, and the finished result, dubbed One Charlestown, would bring not only mixed-income housing, but also retail and commercial space to the neighborhood.
“The way you incentivize developers to reconstruct and preserve 1,100 units of decaying or outdated affordable housing is by allowing the developers to put in another 1,600 units of mixed- and market-rate units along with retail that helps support their investment,” Falardeau said. “The city can use density and zoning as tools to meet their goals.”
One Charlestown is one example of the many ways private developers and city officials can work together to meet affordable housing goals. Another strategy has been for city officials to rezone areas for increased density and multifamily use in exchange for affordable development. This allows developers to work on projects like brownfield redevelopment, taking former hazardous industrial hubs, cleaning them up and repurposing the land for multifamily housing.
“It’s all about creating a safe and vibrant project that addresses the needs of residents while preserving the neighborhood’s character,” Falardeau said. “They have to work with the local developers to come up with a model that is appropriate for that region, both in density and in use.”
There is partnership on the financing side, too. Government-sponsored agencies Fannie Mae and Freddie Mac have continued to offer more favorable financing terms for affordable housing and develop lending programs that incentivize multifamily developers to preserve and build affordable housing. Loans made on restricted properties generally fall outside of Fannie and Freddie’s federally issued lending caps of $35B. This incentivizes people to look for affordable housing loans and has incentivized the banks and borrowers to look into deals or projects with affordable housing components, Falardeau said.
While the majority of agency lending focuses on affordable housing preservation, secondary efforts from Fannie Mae and Freddie Mac can also support affordable development. Both entities offer forward-commitment construction programs in which they partner with construction lenders, like KeyBank, by providing a forward commitment, where they commit to taking out the construction loan once construction is complete. This allows banks to make that initial loan safely and price it moderately.
A newer program is Fannie Mae’s Healthy Housing Rewards program. To encourage healthier design and community-oriented services in affordable projects, Fannie offers interest rate deductions and other financing benefits to building owners who add resident services like after-school tutoring. In some cases, Fannie Mae will match the yearly cost of the program to a reduction in interest rate payments.
Collaboration and partnership are also part of KeyBank's commitment to providing borrowers with affordable housing loans. The bank emphasizes a multidepartment approach to loan execution. From the Equity and Low Income Housing Tax Credit group to Construction, Development and Lending and Bond Underwriting, every borrower has access to an expert at each stage of a project’s financing life cycle.
“We have a strong commitment to it and leverage all the bank’s resources when looking to execute these loans,” Falardeau said. “Our goal is to collaborate closely with developers and investors of all sizes whom we can be relevant and meaningful to and who fit our collaborative business model. We’ve been successful doing that in Boston and in other cities throughout the country.”
This feature was produced in collaboration between Bisnow Branded Content and KeyBank. Bisnow news staff was not involved in the production of this content.