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High Construction Costs Birth New Hot Spots, Kill Workforce Housing

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Boston multifamily construction costs are soaring, and the staggering price point is creating unexpected hot spots and demanding action for more workforce housing.

High Construction Costs Birth New Hot Spots, Kill Workforce Housing
Transom principal Bryan Lee

“The single biggest challenge [in mixed-use and multifamily development] is construction costs,” Transom principal Bryan Lee said. 

Lee's firm is behind a $97M apartment tower set to break ground in Boston's Bay Village neighborhood in 2018. Boston is the third-most-expensive city in the United States for multifamily construction, behind New York City and San Francisco.

Increases in hard and soft building costs in metro areas like these have led to a surge in pricing, especially in taller buildings. The average price per SF nationwide rose 20% from $194.60 in 2013 to $233 this year, according to a Fannie Mae report

Land prices are high. They run between 10% and 15% of the total development cost, Lee said at Bisnow’s Boston Multifamily Growth & Expansion event last week. Hard costs account for 80%.

There are cost challenges in developing a project in Boston, but he points out some of the hardship can be good if you have deep pockets. Higher costs can constrain supply, which benefits the players able to forge through the development process. 

Higher costs have also altered what constitutes a desirable neighborhood. 

“I think, for some of us, it’s unbelievable,” HYM Investment Group founding partner and managing director Thomas O’Brien said. “My nephews are three, four, five years out of college and say, ‘I hope I earn enough money so I can save up for Somerville.’ You say to yourself, ‘holy mackerel.’”

Somerville, which is on the outer reaches of Boston’s rapid transit lines, has seen the average condo price rise 50% since 2013 to $571K. The urban core is an even more financially out-of-reach scenario. The median listing price of a condo in central Boston is $1.9M, according to a Collaborative Cos. report. Boston’s average condo price increased 68% over the last six years, and developers are finding it difficult to build anything but luxury developments given the current market condition.

Four Seasons Hotel and Private Residences One Dalton Street, Boston
The Four Seasons Hotel One Dalton Street

“We’re at a certain point of the cycle where the costs of producing housing have gone way up,” O’Brien said. “Especially in the rental housing market, the costs have exceeded rental growth to the point where it’s difficult to pencil out high-rise development unless it’s at the absolute best locations in the city.” 

Boston's leaders have done a great job pushing for more affordable housing, he said, but there could be a more aggressive joint city and state effort for workforce housing. Local tax subsidies are often not enough to offset high construction costs. The cost of land might decrease, but materials and labor are not dependent on the laws of supply and demand, according to the Fannie Mae report.

High Construction Costs Birth New Hot Spots, Kill Workforce Housing
HYM Investment Group founding partner Thomas O'Brien and
Transom principal Bryan Lee

“There just aren’t enough resources in one city to accommodate all the need for workforce housing,” O’Brien said. 

Workforce housing is tricky to accommodate with subsidies, since it caters to an income bracket largely ignored by current federal affordable housing programs. Most affordable housing programs target those making 30% to 60% of the median local income, Lee said.

Considering the namesake population occupying workforce housing makes 60% to 120% of the average area income, the gap is significant. Under President Ronald Reagan, federal spending on subsidized housing dropped from $26B to $8B, severely impacting middle-income earners. 

“There are literally no federal dollars available for moderate income or workforce housing, and it’s just not right,” O’Brien said. “We have to figure out how to do that as a country.”