By Joan Vennochi | The Boston Globe
How do you make housing affordable in a state that desperately needs it? One tempting solution is to pass a law that caps rents.
But what if the mere possibility of that outcome freezes financing for most new housing construction?
According to a recent letter sent from a national real estate financing firm to Cabot, Cabot & Forbes on the state of investor interest in a multifamily housing project, that’s exactly what’s happening in Massachusetts. Despite “a strong employment base, superior quality of life, distinguished institutions and constrained housing supply relative to demand — the current transaction market is essentially frozen,” states the letter, which was shared with me on the condition that the financing firm was not identified.
Why? Because of increases in short-term and long-term interest rates, increases in construction costs — and the possibility of rent control as proposed in a ballot question that may come before voters in November. As the letter puts it, “Other markets across the country are seeing an uptick in transaction activity and new development despite the national macroeconomic headwinds, but the prospect of rent control has effectively suspended investor appetite for new investments in Massachusetts.”
“We would like to build in Massachusetts. We continue to try,” Jay Doherty, the CEO of Cabot, Cabot & Forbes, told me in an interview. But on three Massachusetts housing projects that his company is currently working to develop in Woburn, Lexington, and Lowell, financing won’t come through “until they see how the referendum goes,” he said. “Anyone who hasn’t locked in their financing is going to have tremendous difficulty doing so until the end of the year.”
Is the freeze on financing real, or just a way to manipulate public opinion before November, when the ballot question will be decided?
“It’s hard to know what’s real and what’s a scare tactic,” Lew Finfer, a longtime housing activist, told me. While the ballot question exempts new construction from being subjected to rent control for 10 years, that’s stricter than a previous Boston rent control law that was in effect in Boston from 1972 to 1994 and exempted all new construction from any cap on rent, he noted. The ballot measure would also exempt buildings with four units or less.
If passed, the ballot question would create one of the strictest rent ceilings in the country, limiting annual rent increases in many apartment buildings statewide to 5 percent or the Consumer Price Index, whichever is lower. A decision to broaden the proposal from a local option to a statewide mandate also increased the stakes from the housing investment side.
Carolyn Chou, director of the Homes for All coalition, which is leading the rent control ballot campaign, said that people across the state need predictable, stable rents, and the 10-year exemption for new housing construction provides a window for that to happen before rent control kicks in. “We know we need to do both, build more housing and stabilize rent,” Chou said in an interview. “We believe this ballot question allows us to do both.”
Doherty sees it differently. With the overlay of rent control, investors will look at development projects other than housing, or in places other than Massachusetts, he predicted.
As he explained it to me, multifamily housing projects are typically funded by investors such as pension funds, endowments, and bundles of private investors working through an investment manager. These investors set financial parameters for the money they must make on their investments to meet their future financial obligations. To do that, they select investments that deliver returns better than risk-free investments, such as US Treasury bonds.
“A no-risk investment is a US 10-year Treasury bond,” Doherty said. “Today, that is a return of about 4.25 percent return, so the real estate must return much better due to its risk. Right now, that better is 6.5 percent to 7 percent.”
Doherty sent this estimation, via email, of how the numbers on CC& F’s Woburn project would work right now:
The total cost of building 250 units would be $120 million, or $481,603 per unit.
With a projected average monthly market rent of $3,200 per month (with 15 percent of the units set aside below market rate as “affordable”), the total gross annual income for 250 units would be $9.6 million.
Annual expenses (real estate taxes, insurance, utilities, property management, etc.) are projected at $2.5 million.
Net operating income (income from property after all expenses) is projected at $7.1 million.
That puts the return on $120 million at 5.91 percent, he said.
“Based on the above returns, investors will not even look at the project,” said Doherty. “Rent control is just another piece of iron rebar on the camel’s back.”
Faced with the prospect of rent control, “Investors can go off and invest in data centers” or lease warehouses “to Amazon,” where there will be no such future income restrictions, Doherty told me. As far as doing what’s good for society, “Most of these investors do not care about the social good,” he said.
Some do. One example is a Bunker Hill affordable housing project in Charlestown that was recently discussed in the Globe’s Power Play newsletter. While investors in that project accepted slightly lower returns, it is not what Doherty sees as standard investor behavior.
The reality is that the rent control ballot question adds new uncertainty to already existing uncertainties created by tariffs imposed by the Trump administration and rising energy costs due to the war with Iran. Uncertainty tends to freeze people in general, and in this case, it seems to be contributing to a freeze on investment in housing in Massachusetts.
And that’s even before the fate of the rent control ballot question is known.
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