In the realm of housing production, one of the most pressing challenges is striking a balance between construction costs, and ensuring affordability for residents. A recent article titled “Less than 20 percent of renter households can afford new market-rate apartments” authored by Matija Jankovic and published by the Massachusetts Housing Partnership ( https://www.mhp.net/ ) sheds light on this intricate relationship, exploring the factors driving construction expenses and their implications on housing affordability.
The findings from the MHP article ultimately unveil a concerning reality: only a meager 20% of rental households in the Commonwealth possess the financial capacity to afford rentals in newly constructed buildings. This revelation starkly underscores the formidable obstacle in building housing…even just tailored for middle-income individuals. MHP meticulously analyzed various development and construction variables (which are detailed in the article and use a construction cost tool provided by the Boston Globe https://apps.bostonglobe.com/2023/10/special-projects/spotlight-boston-housing/construction-costs/ ). Variables included obligatory affordable unit quotas, parking stipulations, geographical considerations, the labor dichotomy between union and non-union sectors, and the integration of environmentally sustainable building practices.
Within their analysis, they created 3 distinct scenarios intended to capture a range of price points for new developments, from the lowest rent based on the inputs provided ($3,133/month), to the highest rent ($5,144/month). The inputs used in MHP’s “Standard Practice” option (the middle of the road option) were based on common construction practices they have observed in the field and represent a type of new development that is often seen in downtown locations. MHP included a “Household Income Needed” field in their analysis which they state was “derived from the estimated rents using the 30-percent rule” i.e. that households would spend no more than 30 of their income on housing costs. The end result of this “Standard Practice” construction process indicated that an average monthly rent of $4,076 would be necessary for the economic viability of that type of construction project—a figure that renders it accessible to only 11.5% of households in the state. MHP graphically summarized this in the chart below.
A few other shocking stats presented in the MHP analysis are as follows:
Out of +/- 1M renters in Mass…80% cannot afford the rents needed to justify the construction of that housing by a developer. MHP chart below:
The US Bureau of Labor and Statistics provides wage data by area and occupation. When looking at average salaries of workers across nearly all occupational groups in Massachusetts…only two groups meet the income level required for the lowest cost construction type. MHP chart below:
The author of the MHP article does clarify that this data represents incomes of individual workers rather than households, where multiple incomes may be used toward rent. However, they go on to state that “in many cases, even households with two or more paid workers or households where workers hold multiple jobs would struggle to afford rent in newly constructed apartments.”
Overall, this situation poses a dual challenge affecting both renters seeking housing options that they can afford, and developers seeking economically viable projects to construct. With limited existing housing inventory in the Greater Boston area, renters spanning various income brackets will find themselves competing for the same existing units. This can result in pushing monthly rents, that at times, approach figures close to new construction. And, at the same time, with the costs associated with new construction continuing to soar, developers face the dilemma of either constructing units priced at high-end points or opting out of housing development endeavors in Massachusetts altogether. Neither situation productive to affordable rental rates…
In what could be a whole separate discussion…the financial complexities discussed above are then further compounded by the many existing challenges posed by local zoning regulations and the protracted entitlement process prevalent in numerous Mass communities.
This is a beyond complex predicament that is the result of years of these overly restrictive zoning regulations, out of control inflation, and overall poor wage growth for the majority of our states residents. It is unrealistic to ever expect a reduction in housing expenses, while simultaneously escalating the burden of construction requirements and costs.
So what can be done?
Streamline Regulations: Simplifying and streamlining regulations can expedite the entitlement process for new housing developments, reducing the time and costs associated with obtaining approvals. By minimizing bureaucratic hurdles, developers can bring projects to fruition more efficiently and cost-effectively.
Incentivize Affordable Housing: Implementing incentives or subsidies for developers who include affordable housing units in their projects can help diversify housing options and ensure that a broader range of income levels is accommodated. These incentives may include tax breaks, density bonuses, or grants specifically earmarked for affordable housing initiatives. It is very important to also understand that “affordable housing” is not the “projects” of yesteryear. As shown in the data above, affordable housing fits the need for most of our workforce here in the Commonwealth.
Address Zoning Constraints: Reforming zoning regulations to allow for more flexible and diverse housing options, such as mixed-use developments or higher-density housing in urban areas, can help alleviate supply constraints and make housing more accessible and affordable.
Encourage Innovation: Embracing innovative construction methods, materials, and design approaches can help reduce construction costs without compromising quality or safety. By promoting innovation within the construction industry, policymakers and stakeholders can find creative solutions to make housing more affordable. Additionally, Investing in workforce development programs aimed at training and educating skilled laborers in construction trades can help address labor shortages and mitigate the impact of rising labor costs on construction projects.
Promote Public-Private Partnerships: Collaborating with private developers and leveraging public resources to finance affordable housing projects can help bridge funding gaps and facilitate the construction of more affordable housing units. Public-private partnerships can harness the strengths of both sectors to address housing affordability challenges effectively.
It’s easy for politicians to point the finger for this situation only at for profit construction developers / investors … but that is truly low on the actual list for why we are here. Its time for them to wake up and realize that addressing the housing crisis also requires their action in addressing long standing local regulatory barriers, investing in infrastructure to support new development and promote creative/adaptive zoning policies (vs. a one size fits all municipalities approach). By taking comprehensive action on these items, coupled with efforts from the private sector to reduce material/labor costs, policymakers can make meaningful progress towards slowing and ultimately reversing the the current trend of housing unaffordability.
The Massachusetts Housing Partnership and the author, Matija Jankovic, deserve many thanks for shedding light on this critical issue. Their efforts provide valuable insights into the challenges facing housing affordability and underscore the urgency of concerted action from policymakers and stakeholders alike.
Full article, data, and quotes referenced above can be found here: https://www.mhp.net/news/2024/construction-costs-and-affordability