Boston Developers Say Interest Rate Cuts Not A ‘Magic Switch’ As Local Policies Complicate Deals

The construction slowdown in Boston has been expected to end as the Federal Reserve brings down interest rates, but developers say it may not be that simple.

A series of policies enacted by Mayor Michelle Wu’s administration — including property tax hikes, inclusionary development expansion and sustainability regulations — have continued to make new projects difficult to pencil, business leaders and developers said last week at Bisnow's Boston State of the Market event held at the Seaport Hotel. 

On Thursday, the Federal Reserve cut interest rates by 25 basis points, marking the second straight cut after it began to hike rates in 2022 and then left them elevated. As capital markets begin to stabilize, Boston business leaders said the city needs to rethink its policies around development to keep its competitive edge.

WS Development Senior Vice President Yanni Tsipis said the city has been stacking policies on top of each other in a way that could destabilize the industry.

"Think of a Christmas tree or a holiday tree, and if you add too many ornaments to the tree it falls over," Tsipis said. "Everybody has a set of priorities at the staff level, and everybody's hanging ornaments on the holiday tree, and at some point that tree just becomes unstable and the project becomes infeasible."

The interest rate cuts have created a positive psychological boost to investors and others in the market, but Tsipis said lower rates are far from the only ingredient needed to jumpstart development in Boston.

"I think we've all been approached by policymakers, members of the media, other stakeholders, saying, 'Geez, that's great, The Fed cut rates. When are you starting your next project?' As if it was some kind of a magic switch, far from it,” Tsipis said.

One of the policy hurdles business leaders pointed to was rising property tax rates in Boston.

Earlier this month, the Greater Boston Chamber of Commerce joined three other business groups in urging Wu to scale back her proposed tax hike on commercial properties, an effort to avoid a projected $1.5B loss in tax revenue in the next five years due to plummeting office valuations.

Wu had proposed raising the tax burden on commercial properties from 175% of residential properties to 200%, but she ultimately reached an agreement with business leaders for 181.5%. The proposal passed the city council last week and still needs to pass the state legislature.

While the tax hike was softened, business leaders see it as just another hit to the already weakened real estate sector.

“I don't feel good,” Greater Boston Chamber of Commerce CEO Jim Rooney said. “I don't feel good to have to negotiate in favor of a commercial real estate rate increase. But I do recognize that in the moment it wasn't good for the city or the region to have a business community, a mayor and a legislature, in this case publicly, at odds with each other.”

Wu’s Inclusionary Development Program expansion has become another hot topic for developers and business leaders as the state's implementation of it began on Oct. 1. NAIOP Massachusetts urged city officials to delay the new requirement, which would require developers to set aside 20% of new residential units as income-restricted, up from 13%.

NAIOP CEO Tamara Small argued that the updated IDP provision would "further dampen already depressed housing production," the Boston Business Journal reported.

"We have to think about what it means to attract development, particularly in the housing space. If you ask me to pick one [thing to get rid of], inclusionary zoning," Rooney said. "I'd suspend it for five years and just say, 'Let's put some deals on the table.'"

Developers are also scrambling to meet fast-approaching sustainability deadlines that are adding more costs to a project's bottom line.

"There's a lot of requirements as it relates to climate resiliency, energy — all good intent, all the right things to do, but it certainly adds cost to a project," SGA President John Sullivan said. "When you layer that on top of land costs and some of the affordability requirements, each project is kind of unique in terms of the pathway moving it forward."

The mayor has also proposed modernizing the Article 80 process, which is the review of projects 20K SF and larger, in an effort to streamline the notoriously slow process. Many developers are anticipating the change but have been waiting since the mayor mentioned it last year.

"I think the Article 80 modernization effort that Mayor Wu's administration is going through will help so far, based on the action plan," Berkeley Investments President Young Park said. "I think the reaction – particularly amongst our peers in the developing communities – is that there are some improvements, but it's still very blurry, and some of the issues that are very practical."

Park said that because of these policies and out-of-date zoning processes, it's hard to make projects work, especially the projects that have already been approved by the city's planning department. Park said there are 30,000 units that have been proposed but not begun construction in the Boston area.

"I think the bigger problem right now is getting these projects, the 30,000 units, started," Park said. "I'm talking specifically about how Boston's situation is very different than the suburbs, and there are some communities that are much more advanced in terms of the speed and the responsiveness within the entitlement process."

Rooney was in Toronto in late October as part of the chamber's City To City tour, and he said the Canadian city and Boston have very similar issues, including housing affordability, high-cost and high-growth areas and antiquated transit systems.

Rooney said the biggest distinction between the two cities is their approach to development. Toronto has seen an influx in development with over 200 cranes in the sky, more than any other major North American city, according to Equipment Journal.

"They boast about the fact that if you add up all of the cranes in U.S. cities, it's less than what they have in that one city of Toronto. They are doing development," Rooney said. "They're focused on housing because they have a lot of the same challenges we do."

He said that the city was able to do this because it shifted its needs and goals to focus on housing production and work with business leaders to get it done. He said one of the biggest differences is Toronto Mayor Olivia Chow's efforts to negotiate certain fees rather than just implementing them. This has helped the city get more projects off the ground.

Many of the Boston policies that are being talked about now were born in a different time for the city when things were growing after part of I-93, also referred to as the Central Artery, was replaced with an underground tunnel, according to Rooney.

He also said that city leaders have to pivot and think about the implications of taking on new policies in a market that can't handle them.

"Maybe we need a mindset shift from the post-artery era — all of that development growth that took place — to the post-Covid era, recognizing the current context of market forces that no politician can control," Rooney said.