The Developer Download: Michael Procopio Talks Housing Choice 03/28/22
By: Michael Procopio, CEO The Procopio Companies
The Oxford dictionary defines crisis as “a time of intense difficulty, trouble or danger,” and while we can look around and find heartbreaking examples of truly unfathomable crisis – think Ukraine – we often fail to fully grasp the depth of the housing crisis that is unfolding right in our neighborhoods. According to the Warren Group, the average price of a home in Massachusetts exceeds $535,000, while Zumper, an apartment listing aggregator, shows the average cost to rent a one-bedroom apartment at $2,030 per month, or $24,360 per year.
Ask your first-time buyer friends – or any buyer for that matter – and you’ll discover that the stories of homes selling for 10-15% (or more) over asking, with waived inspections and waived appraisals have become the norm - indicating the deep desperation of buyers in a white-hot seller’s market. Similarly, with rental housing units, new leases are turning over at 15-20% premiums and in-place renewals are seeing increases of nearly 10% in most submarkets.
But what creates these conditions? Is it the unchecked greed of sellers, landlords and developers? I would argue not. Development yields (read profits) are lower now than at any point in recent history. In 2019, unlevered return-on-cost generally hovered between 6-7%. Today, you’re lucky to be over 4.75% - a massive compression in yields. Operating costs are running at double-digit inflation, labor costs are skyrocketing, and construction costs overall are up over 50% in a 24-month period. Operators of stabilized multifamily assets are operating them on thinner margins than ever, pinning the success of their business plans on outsized rent growth in an inflationary environment, and builders of single-family homes are dealing with construction costs 50% higher than a year ago with no corresponding rise in sale prices.
The housing market is a market. It’s the exchange of goods (housing) between willing sellers and buyers (or owners and renters). As with any market, it is heavily influenced by supply and demand forces – if there are 100 homes on the market, and only 10 buyers, prices will deflate, while if there are only 10 homes on the market with 100 buyers, prices will inflate. These are the conditions we find ourselves in in the Commonwealth today.
From 1960-1990, Massachusetts gained approximately 1,000,000 new residents and permitted 900,000 new dwelling units. From 1990 until 2020, Massachusetts gained another 1,000,000 new residents, however, permitted only 470,000 new units of housing.
The housing crisis is a supply and demand crisis. We must build more housing.
Inclusionary zoning, housing trusts and voucher programs all nip around the edges of the issue and have, at best, a minimal impact on affordability, and no impact whatsoever on housing supply – in fact, arguably, affordable requirements in some areas are so onerous that they remove many projects from viability, ultimately reducing the overall supply.
Due largely to local control of zoning regulations and a healthy dose of NIMBY-ism, there just aren’t enough homes being built. Over the past thirty years, cities and towns have been wildly successful at slowing development, denying multifamily housing permits and reducing density – the exact opposite of what is needed to address the underlying supply issues of this crisis.
We need faster development, more multifamily permits, and far greater density, not only to begin to get ahead of the supply problem but to give people choices in their housing options.
In 1969, the Massachusetts Comprehensive Permit Act became law, allowing developers, in certain circumstances, to override local zoning and density requirements, provided certain affordable housing thresholds were being met. In the years since, Chapter 40B became one of the more useful and pragmatic methods of both increasing housing supply and increasing the number of deed-restricted affordable housing units. Since its inception, over 60,000 units have been constructed under Chapter 40B, including 42,000 rental units and 18,000 ownership units. Furthermore, I would suggest that at least that many have been produced under threat of 40B, whereby local communities came to the table cooperatively, if somewhat grudgingly, to approve a project rather than have the developer file it under a comprehensive permit.
Over the past fifty years, Chapter 40B has been the most impactful piece of legislation aimed at increasing housing production. Until now.
The 2021 Economic Development Bill, which was passed by the legislature and signed by Governor Baker late last year, includes a provision called the Housing Choice Initiative, which requires all 175 communities serviced by the MBTA to adopt local zoning changes to allow for multifamily housing production by right.
The legislation requires that the new zoning district be at least 50 acres in size, be located within a ½ mile of the MBTA transit station and allow for density not less than 15-units per acre.
Draft guidelines from the Department of Housing and Community Development set forth the number of housing units that these zones must allow for, taking into account existing stock and the level of transit service in the community – the minimum is 750 units, although most communities will be required to allow significantly more.
It's hard to overstate the impact that these requirements will have on housing production in Massachusetts. Most of the MBTA serviced gateway cities – places like Worcester, Haverhill, Lynn, Beverly and Brockton already allow for multifamily development in their central business districts in close proximity to transit, and in all fairness, have done their part in aggressively permitting housing.
The larger impacts of this legislation will be seen in the suburban communities serviced by the MBTA – places like Wellesley, Weston, Newton, Cohasset, Winchester, Wilmington, Natick, Norwood, Reading Lincoln and many others. It's in these historically development-resistant, low-density single-family suburban communities where the largest impacts of this legislation will be seen, and rightly so.
Multifamily housing is by far the most efficient way to increase supply and to start to ease the pain of the housing crisis – and the multifamily housing of today isn’t the apartment tenements of the 1960s. Modern multifamily housing is beautifully designed, well integrated into the community, and far more environmentally sustainable than its single-family counterpart. Multifamily communities are an activated and vibrant part of their communities, and provide optionality on lifestyle, unit size and housing cost in a way that single family homes never can.
If we expect to make any meaningful progress in solving the housing crisis, everyone has to do their part to increase supply – including the suburbs. Expanded housing development isn’t just the responsibility of the urban centers and the gateway cities but is an integral part of housing choice and livability in the suburbs.
Change is always difficult, and even more so when it comes to local zoning changes under Massachusetts’ decentralized home-rule system. Not unlike 40B, local municipalities and their advocacy organizations have pushed back hard on the Housing Choice Initiative, unhappy with the loss of local control, and the perceived urbanization of their town centers.
Objectively, this legislation and the subsequent guidelines from DHCD, while mandating the creation of the new zones and general guidelines about use and density, give a great deal of leeway to the host communities, who have the opportunity to take these new requirements, shape them within the context of each local community, and leverage the new housing and economic development for further local improvements.
The Housing Choice Initiative will be a critical piece of the continued growth that Massachusetts has seen, as it provides the only real solutions for housing a growing workforce seeking optionality and convenience. No longer just the state of the “Meds and Eds,” Massachusetts has become a juggernaut in biotechnology and life sciences. For over 25 years, Massachusetts has been the leading recipient of funding from the National Institutes for Health and is home to over seventy top-ranking higher education institutions. In 2020, it was second in the nation for venture capital funding, with over $7 billion flowing into Mass-based firms and startups.
This remarkable growth has positioned Massachusetts as a leader nationally but is unsustainable without the accompanying housing and infrastructure to support the job creation and net migration. Workers in 2022 seek options and flexibility in their careers, work-life balance and housing options - the outdated assumption that a single-family home in the suburbs and the accompanying 60-minute commute will work for this new generation is both unrealistic (think price and availability) and unwanted. This new and innovative generation wants something different, and multifamily community living, with its social impact is a big part of it.
Every option should be on the table to bring vibrant, high-density, and transit-oriented housing to every community, and to give optionality across demographics and economic profiles. This initiative will be profoundly impactful to residents new and old, looking for safe, quality and reasonably affordable housing with access to transit, and will set the baseline for decades of multifamily development and tens of thousands of new housing units. It will create life-changing options for residents and communities alike and will eventually take its place alongside 40B as one of the most impactful and pragmatic pieces of housing legislation of our lifetimes.
Michael joined the Procopio Companies full time in 2003, and is the Chief Executive Officer of the firm. Michael is responsible for strategic planning, growth, corporate management, and overall leadership of the firm. In 2019, he was selected as one of two national finalists for the National Association of Home Builders Multifamily Pillars of the Industry One-to-Watch AwardBLDUP >>