Why Boston rents are so high.

Basically what I have been re-iterating on this board for the past couple of years. Boston needs to build both luxury (actually less of this as of now) and affordable housing at the same time. Anyone on this board who have been constantly harping that building any type of housing, even if it's only luxury housing, would one day depress housing prices enough that it's affordable needs to read this article. The reality is, it won't. You need to target the market to its needs.
 
I liked the article, but I am wondering if the real impact to the end user would be far more unpredictable if much of Boston were re-zoned. Not knowing for sure how high you can ultimately build is in part what creates an arbitrage opportunity for developers. The hope is that you can buy a property zoned for 2 stories at a commensurate price - then get a variance such that you can build 10 stories. Your profit is in the risk you take not knowing what you might ultimately be able to build. The more competently you sell your vision - the more successful you will be.

I do see how re-zoning would remove uncertainty - and I certainly see this helping the current property owners. That is, someone would go from owning a property with a value based on a 2 story approval to a 10 story approval over night. What I don't see is why these owners would leave any money on the table when selling. (Would the increased tax associated w/ the new height approval force them to sell?) In the seaport example given in the article, several owners profited along the way, but no matter how may had their hands involved, the market still only pays what it can. If we took the guesswork out of the equation and provided clear building guidelines at the outset, wouldn't the original owner have simply taken all of the proceeds associated w/ the new zoning? Either way, once all approvals are in, the developer gets every penny they can based on supply and demand - and the market pays what it must. I'm not clearly seeing how this would impact the price to the person who buys the condo or rents the apartment.

The only way to drive the price down, as I understand it, would be to add large numbers of new housing stock. Perhaps large scale re-zoning could help achieve this, but what would that do to the values of current property owners?
 
nico said:
The only way to drive the price down, as I understand it, would be to add large numbers of new housing stock. Perhaps large scale re-zoning could help achieve this, but what would that do to the values of current property owners?
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Their property values would go up more slowly. Local businesses would have greater access to talent and customers. Economic growth is really what we want to promote, (not just skyrocketing asset prices and longer commutes)
 
nico said:
Either way, once all approvals are in, the developer gets every penny they can based on supply and demand - and the market pays what it must. I'm not clearly seeing how this would impact the price to the person who buys the condo or rents the apartment.

The only way to drive the price down, as I understand it, would be to add large numbers of new housing stock. Perhaps large scale re-zoning could help achieve this, but what would that do to the values of current property owners?
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Incentives, intervention. That's how you break from the "market pays what it must based on the supply and demand." A lot of the luxury housing market is driven on speculation which is based on what I would considered, misleading information. The article hints at it, specifically, why developers continue to invest in building luxury housing when the current stock is struggling to get residents to buy them. The truth of the matter is, while the luxury housing market has to resort these "1st month free deals" to entice people to rent them out, the overall average housing price has been rising, driven mainly at the middle-class level and the latter is what speculators see.

If you were to breakdown the supply and demand for housing into luxury and middle class, you will see that while the supply curve has been shifting to the right for luxury housing, the supply curve for the middle class has remained relatively stagnant. While people may say building luxury housing will relieve the upward pressure on price as people shift from middle class housing to luxury housing as supply increase, this is simply incorrect.

Unfortunately, most of the new construction you see around town doesn’t match real demand. Developers have built rental and condo towers filled with studios and one-bedrooms designed for people with disposable income seeking luxury living—empty-nesters fleeing the ’burbs, transient DINKs, our well-endowed students. But those units are too small to accommodate Boston’s two major growth groups: millennials who double- and triple-up to afford the rent, and families. As a result, new luxury rental buildings, such as Chinatown’s Radian tower, have had to offer unbelievable deals—like three months of free rent—to compete for the wealthy minority.
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As touched upon by this article and as explained by me numerous times, luxury and middle class housing serve two different demographics and are essentially two different products. I'll make the analogy again, the housing market is like cars. You can't just keep building Lamborghinis when the market is looking for a Toyota Highlander. The price for Lamboghinis will never drop enough to become affordable nor does it satisfy the needs of the middle class consumers.

This is why the city needs to put pressure on developers to build not just luxury housing, but affordable housing throughout the city. Building only luxury housing will not put a dent in the rising price; it needs to be both.
 
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In a similar vein, here are a couple artilces from thew Washington Post on the topic of urban affordability:
https://www.washingtonpost.com/news...we-build-more-housing-for-the-rich/?tid=sm_tw

https://www.washingtonpost.com/news...pensive-cities-affordable-for-everyone-again/

At least among economists, the concensus seems to be that restrictive zoning is responsible for limiting supply in many key urban markets. Less restrictive zoning would lead to more market rate construction, which would lead prices to be lower than they otherwise would be. But, although more construction is neccisary it is not sufficient to provide housing for low income housholds, whose incomes are too low to pay for new construction. They will need some sort of subsidy.
 
Think Texas, Florida, Atlanta, Oklahoma, California, Arizona, New Mexico, Vegas, Salt Lake City, all those southern and western cities and states where there is still plenty of undeveloped land with very very little restrictive zoning. Plus county government mostly rules. All that leads to very affordable housing but with a price...sprawl. But, people can afford to live in a very very nice home. Now think Boston where there limited land available for development and the surrounding independent towns, also with limited land for development as well having extremely restrictive zoning. It's not rocket science to figure why home/rental prices are sky high and frankly, there is little that can be done about it unless the state steps in and forces change within each city and town.
 
Nicely-written article, wildly misses the point.

The BRA is not some stumblebum group that makes it up as it goes along - it's a public agency, expressing the will of the people. The single biggest reason why more housing isn't built in any given community is that residents of that community don't want more neighbors. It can be concerns about school crowding, traffic, "character", or views - all the same thing. People don't want more people sharing their stuff.

Boston zoning isn't inadequate because the BRA is incompetent - it's by design. Boston residents want to have a lengthy approval process for every building that could possibly happen near them, particularly if that building is big. Demanding that every major development seek a variance is a way to ensure that the community express its displeasure with each of them, as well as giving the City a chance to exact some ransom. It's funny that the article wants both - the zoning should allow developers freedom and certainty, but the City should still get the ransom from all of them.

Residents of Boston, Cambridge, Brookline, etc. want exclusivity (i.e., only they and their friends can live there). As a result, they get exclusivity (i.e., only people way richer than their kids can afford to live there). Until we get out head out of our collective @$$, that reality isn't going anywhere.
 
KentXie said:
As touched upon by this article and as explained by me numerous times, luxury and middle class housing serve two different demographics and are essentially two different products. I'll make the analogy again, the housing market is like cars. You can't just keep building Lamborghinis when the market is looking for a Toyota Highlander. The price for Lamboghinis will never drop enough to become affordable nor does it satisfy the needs of the middle class consumers.
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This article (and many others) keep pretending that all new housing is Lamborghinis though. Yes, 22 Liberty is a Lamborghini. The Millennium Tower is as well. Most new buildings are priced like a brand new Accord with all the amenities added. Yes, it is nicer than the 20 year old Accords and 10 year old Accords that already exist. And it is a lot nicer than the rusted out 30 year old Corollas found on some streets.

But how do we get 10 and 20 year old Accords? By building new Accords. And someone pays top dollar until they filter down and become old Accords.

We also have new Civics being built in the city, which will become old Civics in time.

Everyone says the deals offered on new apartments show a failure, but no one sees a failure when a car dealership (or any other business) holds a clearance sale to get old inventory off their lot. These are just examples of segmenting the market, not some failure by the developers to foresee demand. The economic concepts of coupons is taught in nearly every microeconomics class as the way to have customers with different price sensitivities pay different prices for the same product. Most of the new housing coming onto the market uses the same modern pricing strategies.
 
Two-thirds of Bostonians rent, don't own. This is third-highest in US (Miami, NYC are higher; LA and SF about equal to Boston).

I wonder if this has any effect.

PS. I don't agree that "investors" are ruining our real estate market, at least at the high end, if that's what you mean. Low-end, every city saw investors scoop up cheap real estate, right? At the high end, I think Boston is mostly-owner occupied.
 
dwash59 said:
This article (and many others) keep pretending that all new housing is Lamborghinis though. Yes, 22 Liberty is a Lamborghini. The Millennium Tower is as well. Most new buildings are priced like a brand new Accord with all the amenities added. Yes, it is nicer than the 20 year old Accords and 10 year old Accords that already exist. And it is a lot nicer than the rusted out 30 year old Corollas found on some streets.

But how do we get 10 and 20 year old Accords? By building new Accords. And someone pays top dollar until they filter down and become old Accords.

We also have new Civics being built in the city, which will become old Civics in time.

Everyone says the deals offered on new apartments show a failure, but no one sees a failure when a car dealership (or any other business) holds a clearance sale to get old inventory off their lot. These are just examples of segmenting the market, not some failure by the developers to foresee demand. The economic concepts of coupons is taught in nearly every microeconomics class as the way to have customers with different price sensitivities pay different prices for the same product. Most of the new housing coming onto the market uses the same modern pricing strategies.
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Agreed but unfortunately the rate we are building these "Accords" is no where near the rate needed to keep up with demand and there's a few reason for this. Currently, one of the recent new 'hot' trend going on in real estate market is the micro-unit. The article points out that the micro-unit apartment helps serve the the young techies/entrepreneur demographic but it is definitely not suitable for those who are recent grads as well as those who are looking to start a family. Considering the fact that developers can make significantly more money back by building micro-units than a standard 2-3 bedroom apartments (they are smaller and thus you can fit more in a building), developers have less incentive to build the latter. It's not that the demand for standard 2-3 bedroom apartment isn't there; in fact it's likely that it's higher than micro-units. It's that the price for a 2-3 bedroom apartment, even with the high demand, haven't been driven up enough to generate a higher return than micro-units and it's debatable that it ever will.
 
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What % of the market do we think micro units account for?

The idea of developers making significantly more money w/ micro units is interesting. In suburban development, I've always understood the opposite to be true. If you want to drive the price up, the idea is to add more non kitchen or bath space to capture more sq. footage in rooms that are less expensive to build.

For every micro unit, you need to include a kitchen and a bathroom. These are the priciest rooms in a unit. W/ micro units, you have a 1/1 ratio for every resident. I would guess that the sales price/ sq. foot must be much higher?
 
I feel like urban markets are completely different than the suburban market. I agree that the suburban market is better suited to add an additional bedroom for added value (with less spent), but with the urban market of Boston the price gap between a studio or 1 bedroom to a 2/3 bedroom does not justify a means to an end. Outside of 128 is family land. the sprawling yard for the kids to play and each have their own BR. In these new construction buildings it is so so easy to locate these utilities and tie them all together, that having these smaller units that go for only a few hundred dollars less a month, the more the merrier!!

In regards to the state, or even city, stepping in, do variances only apply to the current landowner? For example, if the original buyers of the McCourt parcels had received a variance for a height change would that variance only apply to that owner, or does it sit with the parcel? I feel like if they transfer, one way to stop speculation would be to stop the transferring of variances. Of course if they dont already transfer, i just wasted about 60 seconds of all your lives.
 
dwash59 said:
This article (and many others) keep pretending that all new housing is Lamborghinis though. Yes, 22 Liberty is a Lamborghini. The Millennium Tower is as well. Most new buildings are priced like a brand new Accord with all the amenities added. Yes, it is nicer than the 20 year old Accords and 10 year old Accords that already exist. And it is a lot nicer than the rusted out 30 year old Corollas found on some streets.

But how do we get 10 and 20 year old Accords? By building new Accords. And someone pays top dollar until they filter down and become old Accords.

We also have new Civics being built in the city, which will become old Civics in time.
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The problem in Boston is that the only cars for sale ARE the new Accords, and nobody can afford them.. And not enough Civics. There actually isnt time to 'wait" for some assumed point where they will devalue.

I am saddened by our mayor. I think he may be well intentioned, but it is unfortunate that a city such as ours has been managed for so long by men who, let's face it, just aren't that intelligent. OK? They're just not that smart. Nice guys, but way lacking the brains of the NYC mayors... And Mahty wanted to reform the BRA - which as far as Ive heard has not changed at all - and why do we even have a BRA? The housing problem is drastic, and calls for innovative (dare I use the stupid word) and drastic solutions.

The article is right - the city should massively reform the zoning, allowing buyers to have some certainty over what they can build, leave the final negotiations (like going from 24 to 30 stories in the case of the Fenway, for example, instead of going from 4 to 28 stories as has been the case) for the city and neighborhood to wrangle with and extract concessions - and decent concessions! So much money gets wasted in the endless process to get things built here that could be invested into more real community benefits and better architecture...

Get rid of the BRA. It's time.
 
I find this article, like many in Boston magazine, to be much more style than substance. Take, for example, this passage (emphasis mine):

The BRA has also failed to slow down land speculation, leaving consumers (and nearby neighborhoods) to foot the bill. In the Seaport, real estate speculators passed their planning and upzoning costs along to the next speculator, causing land valuation to go through the roof. Put another way: After the public spent $8 billion in federal and state money to ready the Seaport for development, the gamblers went wild buying and selling the potential to build, making tons of money while not building a thing.

Let’s look at one of those deals in detail. In 2004, Frank McCourt sold 23 acres of open parking lots on the South Boston waterfront to News Corp. for $145 million (McCourt was financing his purchase of the L.A. Dodgers). He’d spent years waiting for the city to hammer out a plan for the area, but then unloaded his miserable acres of asphalt. Two years later, News Corp. sold the same land, a little farther along in planning, to Morgan Stanley for $204 million. That’s a 41 percent profit in 24 months without engaging a single crane or backhoe. When the BRA approved the Seaport Square Master Plan, paving the way for major development of midsize towers in 2010, the land finally had real value. Now everyone knew what it was worth. To limit speculating, the BRA could have made Morgan Stanley’s Seaport approvals non-transferrable. But it didn’t.

Instead, over the next five years, Morgan Stanley parceled out its 23 as-yet-unbuilt (but planned and approved) acres to various entities for a total of $654 million. Minus permitting costs, that’s a $450 million profit (more than triple the purchase price). Nice for the investment bank, terrible for Bostonians.

After changing so many hands, the land price was seriously inflated. How did the final buyers offset their costs? They built lots of office space (which is cheaper to build). Few public amenities (why bother?). Fat buildings that take up entire super blocks. And ultra-expensive housing, like at Waterside Place, where a 598-square-foot one-bedroom can be all yours for $2,685 per month. You can’t afford to live here because developers bought land from speculators at hyperinflated prices and had to recoup their costs.
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This makes little to no sense and betrays a serious misunderstanding of how markets work. The author seems to believe that the land is only worth $600+ million because it kept changing hands, and if only Frank McCourt held on to that land for twelve more years instead of selling it then it would be less valuable than it is today. That defies logic. Twenty-three acres in the Seaport are worth $654 million because that is the value the market is willing to pay for it. Demand is high and supply is low so develop-able land sells for a premium, and those Seaport parcels in particular became much more develop-able over the last decade-plus as zoning and permitting changes occurred (as spelled out in the article). It doesn't matter which particular parties owned the property when the planning occurred, all that matters is that the planning occurred at all.The number of times the properties changed hands has no effect on their current value.

Speculation doesn't lead to appreciation, appreciation leads to speculation.

Edit: Waterside Place, which the author cites as an example of high prices "because developers bought land from speculators at hyperinflated prices", is actually built on land leased from Massport. This pretty much perfectly proves my point...
 
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FK4 said:
I am saddened by our mayor. I think he may be well intentioned, but it is unfortunate that a city such as ours has been managed for so long by men who, let's face it, just aren't that intelligent. OK? They're just not that smart. Nice guys, but way lacking the brains of the NYC mayors...
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You mean the genius NYC mayors who created the second worst housing crisis in the country? To pay for all his upzonings, Bloomberg allowed massive downzonings of the outer boroughs - the places where affordable housing was built in the first place. Walsh is committed to building far more housing per capita than any recent NYC mayor - and is allowing far more zoning variances to do it.

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The Boston magazine article gets one thing right: reform zoning. Right now, the cost of waiting for approvals and paying the cost of capital over years of no profits. This makes development all but impossible for the well connected. Historically, real estate development has not been an industry dominated by a handful of politically well connected developers. Before zoning and where zoning is weak, there are numerous small scale builders working at all levels of the market. Once you need connections and insane wealth, not merely ordinary wealth, that becomes considerably harder. Chapeau to Boston Magazine for getting this frequently overlooked point.

That said, there's plenty wrong with this article. The idea that housing needs to be built not only at the upper end of the market is flat out wrong. Even in New York, most neighborhoods were built for the wealthy or prosperous and then filtered down over time (at least while rent was still cheap until 1990 or so). Those former tenements in the Village were once mansions and so forth. City Observatory has been harping on this point (with far more data) for a long time:
http://cityobservatory.org/urban-myth-busting-new-rental-housing-and-median-income-households/
http://cityobservatory.org/another-round-on-the-washington-posts-housing-roundtable/
As they point out, most households can't afford a new car - that doesn't mean, though, that they are shut out of the car market - they buy used.

Similarly, the point about unit size is silly. Developers will not build what the market does not demand. Free months of rent are ways to lower the effective rent without changing the sticker price for the future. Their commonality is a sign of falling rents - which is a great thing! Furthermore, as mentioned above, by pulling younger people out of shared apartments in triple deckers etc, multibedroom housing will be freed up. I saw a statistic (I believe on archBoston) that Boston has some of the largest numbers of 3+ bedroom apartments relative to housing stock of any major city. If the 1-2 bedroom new apartments aren't full, believe you me, developers will start building larger ones. If rents aren't falling, it's a sign we should be upzoning more, not mandating different unit types

The great age of urban affordability in the USA was made possible by lax to no zoning and filtering. Pretending otherwise is silly. Hypercontrolled planning has created the rent problem to begin with - maybe we should ease back on the planning and see where that gets us?
 
Equilibria said:
Nicely-written article, wildly misses the point.

The BRA is not some stumblebum group that makes it up as it goes along - it's a public agency, expressing the will of the people. The single biggest reason why more housing isn't built in any given community is that residents of that community don't want more neighbors. It can be concerns about school crowding, traffic, "character", or views - all the same thing. People don't want more people sharing their stuff.

Boston zoning isn't inadequate because the BRA is incompetent - it's by design. Boston residents want to have a lengthy approval process for every building that could possibly happen near them, particularly if that building is big. Demanding that every major development seek a variance is a way to ensure that the community express its displeasure with each of them, as well as giving the City a chance to exact some ransom. It's funny that the article wants both - the zoning should allow developers freedom and certainty, but the City should still get the ransom from all of them.

Residents of Boston, Cambridge, Brookline, etc. want exclusivity (i.e., only they and their friends can live there). As a result, they get exclusivity (i.e., only people way richer than their kids can afford to live there). Until we get out head out of our collective @$$, that reality isn't going anywhere.
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I would replace the word "resident" with "homeowner" and then agree with this wholeheartedly.

I don't think renters are coming out in droves to oppose new apartment buildings. Sure, there are a few who are worried about neighborhood character or traffic, but the vast majority of vocal opposition is from people who are financially interested in the status quo.
 
One thing that needs to be addressed, though, is this question (which is often taken for granted): Is it universally a good thing if rents fall?

- A condo owner - resident-occupied or not - will see the value of their real estate either fall or appreciate at a slower clip. These aren't moneyed fatcats. And many such owners have most of their nest egg baked into home equity. In other words: for every winner, there's also someone losing out. Does this matter?

- Isn't it ultimately a sign of strength to be among places with the highest cost of living in the US? Ultimately there may be some skewing of the market because of the BRA etc. but ultimately the market decides this is an incredibly attractive place to live and work (despite the fact that median income isn't all that higher than elsewhere, and the fact that the weather sucks!)

- What are second-order impacts? For example: will falling rents will soften the market for new construction? Will there end up being many more condo conversions?

Vis a vis all of the above, what I would say is truly the greater good is transit expansion. It's good at face value, and it's also good at spreading the load when it comes to attractive places to live. It will raise property values but could also stabilize rents. Win win win.
 
fattony said:
I would replace the word "resident" with "homeowner" and then agree with this wholeheartedly.

I don't think renters are coming out in droves to oppose new apartment buildings. Sure, there are a few who are worried about neighborhood character or traffic, but the vast majority of vocal opposition is from people who are financially interested in the status quo.
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Good point. Renters and owners have very different financial incentives - homeowners benefit from property value increases, while renters benefit from decreases.
 
Shepard said:
One thing that needs to be addressed, though, is this question (which is often taken for granted): Is it universally a good thing if rents fall?
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On the whole, all things considered, high rents are absolutely a bad thing for our economy and our society.

High demand for real estate is not a bad thing. It is a sign that the local economy is strong and that people want to live here. A drop in rents and asset values that is the product of a fall in demand (like we saw during the Great Recession) would not be good. For example, if the murder rate skyrocketed and Boston streets became unsafe to walk, or if a hurricane decimated the city and wiped out our infrastructure, prices would surely drop as a result of decreased demand. Nobody wants this.

When we talk about the factors that drive our real estate prices and what to do about them, nobody advocates taking steps to decrease demand. The issue to be addressed is that supply is severely constricted. This makes there be fewer properties available than their would be in a true, open market, and so all of the demand must be funneled into this limited set of available properties. The result is that only those with the highest willingness to pay are able to fit in the market and market price rises well above the underlying cost of production.

Some people (entrenched owners) benefit in this situation, but just about everyone else suffers. We all end up having to pay huge amounts of "economic rent" (to be distinguished from real estate rent) as a result of the scarcity. This cost gets cooked into everything you can imagine (not just housing but food, clothing, drinks, etc.) and makes living here uncomfortable for many and completely unaffordable for even more.

There's really no good reason why we should advocate for home and condo values to appreciate, other than the selfish reasons of homeowners. Housing is a highly illiquid, highly leveraged, non-diversified, volatile asset. We should not, as a society, be encouraging people to invest so much of their net worth in such an investment vehicle. If housing were more plentiful and cheaper and seen as less of an investment, we'd all have more available capital to invest in other, more responsible manners.

If these supply restrictions are drawn back (they will never go away completely) land values would probably increase in the short- to medium-run while the value of built space would decrease (or at least increase more slowly). This is because land is more valuable when more can be built on it, but built space is less valuable when there is more of it in competition. You would not need to worry that construction will suffer as a result of the dropped rents, because rents only drop in the first place as a result of increased construction. This is the big shame of regions like the Bay Area: the great wealth increases that are driving asset values up should lead to building booms that distribute this wealth down the economic ladder. Instead, supply is limited to such a degree that all this wealth gets trapped by existing land owners and doesn't spread to less advantaged groups.

Building values (and rent) will, in an unconstrained market, drop until they reach the cost of construction. City buildings will never be cheap (steel and glass and concrete are pricey) but they can certainly be cheaper than they are now (without the additional cost of scarcity rent). This is evident in less supply-constrained cities like Chicago, Dallas, Atlanta, Houston, Toronto, Vancouver, etc. where nice, new construction can be had for way less than in Boston, New York, San Francisco, etc.

As for truly poor people, increases in supply still won't make urban living affordable for them. This is because poor people don't have a housing affordability problem, they have an everything affordability problem. It's what makes them poor. Just as they can't afford housing they also can't afford food or medicine or energy or any of all sorts of other goods. If they could afford these things at market price, they wouldn't be poor. This is why we have programs such as SNAP and Medicaid to subsidize these necessities for the poor. We'll have to continue doing this for housing as well. The only question is where the burden of the cost for these programs should fall.
 
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