November 29, 2023

Housing Finance Development

It's Your Housing Finance Development

Is lengthy approval process fueling affordable housing crisis?

It’s like watching paint dry or waiting for water to boil.

Pick any euphemism for things that take ages to get across the finish line. You might as well include getting approval for a housing development in Greater Boston to the list.

But is that arduous planning and approvals process — touted as a way to give the community input and ensure better projects — unintentionally driving a wave of housing development skewed heavily toward the luxury market?

It isn’t the sole reason why prices in the region are so high, but there are signs that the longer a project takes to get approved, the odds are it won’t satisfy the demand for affordable housing in one of the most expensive places to live in the country.

“We still have a relative aversion to multifamily development,’’ said Aaron Jodka, director of research of U.S. capital markets at brokerage firm Colliers. “A lot of communities, whether it’s because they are afraid of overburdening schools or traffic or whatever it might be, we just don’t build it.’’

But that doesn’t mean there isn’t a hunger for housing overall, irrespective of the price point.

“The product that has been built has been very successful,’’ Jodka said. “We look at vacancy rates over time in Greater Boston, and they’re fantastic.’’

So who’s to blame?

Prior to the pandemic, there was a bit of a chicken-or-the-egg conundrum with respect to what was driving up costs nationally.

Fingers pointed at developers for gentrifying affordable neighborhoods with high-end projects that sent rents and prices into the stratosphere.

Fingers pointed at the rising costs of building materials and the shortage of workers in the trades.

But fingers also pointed to an elongated approval process. Copious rounds of environmental, design, and historic review run the clock up, critics say, so by the time a project is finally approved, building units that command higher prices is the only thing that made financial sense.

“The process of building new homes is full of uncertainty and unexpected obstacles,’’ Jenny Schuetz, a senior fellow at Brookings Metro and an expert in urban economics and housing policy, said in an early 2020 report on who is to blame for the high housing costs. “Regulatory barriers make it riskier, longer, and more expensive, which has consequences for housing affordability.’’

Schuetz, who wasn’t available for an interview for this story, doesn’t discount the process in her report. Each step serves a purpose, and coastal markets like Boston obviously have a reason to embrace an arduous environmental process. But she also noted that fees accumulate with each protracted step: from lawyers and architects, as well as surveyors, land speculators, and consultants.

“Who ultimately pays the costs associated with land development — whether it comes out of developers’ profits or gets passed along to consumers of new housing — may not be immediately obvious,’’ Schuetz wrote. “What is clear is that a longer and more uncertain process increases the costs of development.’’

East Coast same as the West Coast?

It may be on the other side of the country, but California’s housing crisis could be a warning sign for Massachusetts when it comes to regulatory hurdles hindering production. California, like Massachusetts, consistently ranks in the top 10 when it comes to high home prices, and both states have leaders encouraging the construction of dense, transit-oriented residential developments around transportation hubs (and naysayers opposing such plans).

But it isn’t as easy as saying, “If there’s a train station, your dense housing proposal is approved.’’

“Our work suggests that the chief regulatory contributor to California’s housing crisis is local governments hindering dense housing via zoning and development approval processes,’’ reads a report on social equity in housing the California Air Resources Board and the state’s Environmental Protection Agency released last spring.

“But even where cities zoned more land for dense development, local regulation creates lengthy housing development approval timelines that impact the development of individual projects,’’ the authors concluded.

The study focused on housing production in 16 cities and four counties. The disparity of markets and time-to-approval timelines (it can take a median of 26.6 months on average to get the nod for a five-unit-plus residential project in San Francisco compared with only 5.4 months across the bay in Oakland) creates uncertainty in the development world. Keep in mind: a project would still need more approvals after this entitlement phase to get a full green light.

Why even bother with such a drawn-out, uncertain timeline in one market when you can build much faster in a neighboring city?

“It’s a little bit less of, ‘Oh, Oakland is a model,’ and more like, ‘Well, the problem that Oakland highlights is maybe you don’t have to take 27 months [to approve housing],’’ said Moira O’Neill, coauthor of the report and an associate professor of urban and environmental planning and law at the University of Virginia’s School of Architecture.

The state of construction here

Like California, Greater Boston is also grappling with a severe supply-demand imbalance that keeps home prices high, even when other factors like rising interest rates might normally cool off demand and soften the market.

Restrictive zoning, demographic shifts, older populations still living in sprawling single-family homes, and even the influx of high-paying jobs into the state within the tech and life science sectors also play a major role in the housing affordability and supply crisis, said Susan Connelly, chief operating officer at the nonprofit affordable-housing advocacy group Housing Opportunities Unlimited.

“All those things combined create a foundation on which then the ability of developers to have a clear, predictable path to creating housing that better fits the changing demographic becomes nearly impossible, and that’s where we are,’’ Connelly said. “Do those manmade rules, regulations, and processes affect the production and therefore the cost of housing? Absolutely, but it’s more like the frosting on the cake.’’

When prices on just about everything are so high, that can also mean developers aren’t motivated to build lower-cost units unless a municipality does more to encourage that type of project.

“At the end of the day, developers are in a business of making a return on their investment, and oftentimes higher rents generate a higher return,’’ Jodka said. “So, if I could open a 30-acre plot across the street from me and build 300 apartment units, unless you have an incentive from the city or town, or other program, you’re going to build the housing that’s going to generate the highest return on that investment. Unfortunately, lower-priced units are oftentimes not the priority there.’’

Streamlining the process may help usher in more housing development, because ratcheting up production could ease the crunch.

More than 400,000 new housing units are needed in Massachusetts by 2040 for the state to keep growing its economic base, according to the Metropolitan Area Planning Council. But the state is going to have to put its foot on the gas pedal: The 1,482 new housing permits issued in the state in May (according to the U.S. Census Bureau) were the most in New England but well below the number granted in Sun Belt states like Florida and Arizona and even Mid-Atlantic states like New York, New Jersey, and Pennsylvania.

“We need more of it, no doubt about it,’’ Jodka said. “Different municipalities have rules on the percentage of affordability that’s necessary in any development, but we don’t build enough housing in Massachusetts, plain and simple.’’

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