THE $600,000 PROBLEM
Many forces drive the housing crisis here, and the sky-high cost of construction is one of the most powerful
This series was reported by Tim Logan, Catherine Carlock, Mark Arsenault, Andrew Brinker, Stephanie Ebbert, Diti Kohli, and Rebecca Ostriker. Today’s story was edited by Patricia Wen, and written by Carlock and Logan.
This is the last in a series, which can be found at www.bostonglobe.com/housing.
On a gray morning this month, a construction worker in a neon vest knelt with his tools in a concrete foundation dug into a hillside on the western edge of Somerville, literally laying the groundwork for a project that could help change the way housing gets built around here.
At the same time, 25 miles away in a factory in Littleton, some of the 168 apartments that will soon rise from this foundation were being hammered together, piece by piece.
This 12-story building underway in Somerville’s Clarendon Hill public housing complex is one of the most ambitious experiments in factory-built — or “modular” — housing in New England. By building the apartments — including kitchens and bathrooms — offsite and then stacking them like Legos on this sliver of land, this project’s developers say they’ll deliver it 40 percent faster, for substantially less cost, than a similarsized building they’re constructing the typical way in Boston.
In a business where time is money, that’s a huge difference, the sort of factor that just might jumpstart construction and begin to put a dent in the region’s massive housing shortage. Aaron Gornstein, a former top state housing official who now leads POAH Inc., the developer of Clarendon Hill, said this approach could be a game-changer. If it can be repeated elsewhere.
“And we don’t know that yet,” he said.
The modular high-rise in Somerville represents one of a growing number of experiments to tackle an overlooked but increasingly dominant force behind Greater Boston’s astronomical rents and home prices: the enormous cost of new construction.
New housing often costs $500,000 to $600,000 per unit to finance and build, with high-rises closer to downtown Boston costing even more. Those numbers are baked in from the start, setting a floor on future rents before the first shovel even hits the ground.
And they’re a big reason why building our way out of the housing crisis that’s gripping Greater Boston has proven to be so hard.
Even as towns all over the region finally wrestle with their own histories of blocking the sort of multifamily housing that regular people can afford — the sort Massachusetts desperately needs to preserve its middle class and maintain a vibrant economy — the cost to build that housing has steadily climbed. Land, key materials, borrowing money itself, they’ve all surged in price. While new mandates for affordable housing and green energy aim to address long-term challenges, they too come at a cost. Those costs translate into rents, which even in this skyhigh market have their limits — the point at which potential renters will go elsewhere.
All the rezoning in the world won’t spark a wave of new housing if people can’t make money building it. And, right now, some 30 developers, construction executives, architects, and policymakers told the Globe Spotlight Team, they can’t make the numbers work. It is a troubling conclusion that leads some in the industry to wonder if it’s time to boldly rethink how we build housing to begin with.
For all their present challenges, most of the last quarter-century has undeniably been kind to developers in Boston.
Thanks to ever-increasing rents and land values, owning an apartment building can be a lucrative proposition. Builders have made huge sums by selling projects at the right time and many a generational fortune has been amassed by holding real estate long term.
But the act of building housing can be a tightrope walk, with countless ways to slip up and profit margins that can be slim and unpredictable, especially in the early years. That’s a challenge for developers who need to attract big investors — pension funds and private equity, life insurers and banks — who put up the cash to build projects in the first place and who have a world of options for where to direct their money and will invest elsewhere if they can’t get the return they need here.
The increase in costs comes as Massachusetts is finally making progress on zoning, with the MBTA Communities law forcing many long-reluctant suburban towns to allow more multifamily housing, said Rachel Heller, a longtime Beacon Hill housing advocate. Her organization, the Citizens’ Housing and Planning Association, estimates Massachusetts needs 200,000 new units through 2030 or about 25,000 a year. Through October, barely more than 10,000 building permits have been issued across the state this year, according to the Census Bureau. If nothing changes, next year could see even fewer.
“It’s definitely a game of whack-a-mole,” Heller said. “Financing has always been a challenge but the biggest challenge had been zoning. Now, zoning is being put in place but at the same time every other cost is going up.”
Any developer will tell you building apartments boils down to a simple equation: Can the project bring in enough rent to cover the cost of construction and generate enough profit to attract investors?
If it can, more people get someplace to live. If not, well, nothing happens.
“For me, the math is just math,” said Gary Kerr, managing director in the Boston office of Greystar, one of the country’s largest apartment developers. “We have to make the math work.”
To solve that equation, developers puzzle over dozens upon dozens of variables. But most budgets boil down to a few major ingredients — the biggest being “where,” “what,” and “who.” “Where,” of course, is land. The cost of buildable sites in and around Boston can vary widely, but it’s among the highest in the country. These days, a typical site suitable for mid-rise housing in the outer neighborhoods of Boston or its inner suburbs might cost $40,000 to $80,000 per unit, just for the dirt. That number has jumped in recent years as life science projects — which typically command higher rents than housing — have spread across the region.
Then comes materials, or what goes into a project.
A new building needs tons of cement and steel, wood and copper wire. These are basic commodities that trade on global markets, so when China launches a building spree or Russia invades Ukraine, their prices go up.
Every major ingredient of a multifamily building costs more than it did before COVID, according to the National Multifamily Housing Council; copper prices alone are up 43 percent. Equipment and systems such as HVAC, too, can take far longer to acquire, thanks to global supply shortages and growing demand for costly components.
Ordering an electrical system for a mid-sized apartment building might take 80 to 85 weeks right now, said Ryan Jennette, director of operations at construction firm Consigli in Boston. That’s more than twice as long as it used to, complicating an already-complex construction schedule. After all, you can’t put up the drywall before the wiring’s in place.
“It’s a snowball effect,” Jennette said.
Buildings need builders, too. A small army of laborers and carpenters, plumbers and electricians helps erect every new building. In Boston, many are unionized, at least on larger projects, with total pay and benefits averaging $72 an hour in Massachusetts, according to the Construction Labor Research Council. That’s $10 an hour more than the national average for union workers and roughly one-third higher than non-union labor in Greater Boston, industry experts say.
The unions contend their workers are more productive and reliable, and some builders agree. A few unions, including the Carpenters, offer a lower wage rate for apartment projects than for commercial construction. Technological advances have made building more efficient, reducing overall hours worked. So while construction wages are a significant factor in a project budget, said Frank Callahan, president of the Massachusetts Building Trades Council, they’re not what’s driving costs upward.
“There’s fewer people working on these jobs than 10 or 15 years ago,” he said.
Combined, labor and materials — “hard costs” — account for 75 to 80 percent of the cost of a new building. The rest goes toward “soft costs:” architects and engineers, lawyers and consultants, plus insurance, financing, and the fee developers take to cover expenses and pay their staff, typically 2 to 3 percent of the overall budget.
This is where the region’s tangled permitting process can get expensive. Every month a project waits for zoning approvals means more interest on loans. Every time a planning board orders up revisions means bigger bills to architects. All of it pushes out the date when the rent checks start flowing in to pay everything back.
“Our projects take three or four years,” said Bruce Percelay, chairman of the Mount Vernon Co., a prominent Boston landlord and developer. “You’re car