Boston Developers Say Construction Cooldown Could Create More Opportunities

Higher interest rates and economic volatility are leading to a slowdown in new construction projects in Greater Boston, developers say, but that could come with a silver lining. 

A cooldown in what has been a hot market for years could help bring down the high cost of land and construction and create more opportunities for development in the long run, executives said last week at Bisnow's Boston State of the Market at Two Drydock in the Seaport. 

“All these headwinds are there, we have these problems, but Boston needs to cool down and create some more affordability,” Richard Taylor, managing partner at Nubian Square Development, said at the event.

Taylor, whose firm is working on the 97K SF Nubian Ascends mixed-use project in Boston’s Nubian Square, said that these economic headwinds could eventually open the door to new opportunities for developers.

“The hope is that these headwinds can at least reduce the pricing on the new acquisition side and land side, and I know some people who have overleveraged in their portfolios and got rid of some things,” Taylor said. “You might be able to pick up some things that otherwise were not available.”

In September, the Federal Reserve raised interest rates by 0.75 percentage points, the third consecutive hike of that magnitude, and it is expected to continue raising rates to curb the persistent rise in inflation. This has been a primary cause of the slowdown the industry is seeing, as lenders aren't financing as many projects and developers are dealing with rising costs. 

Nationwide, construction costs in the third quarter were up 8.6% from the same period last year, according to Turner’s Building Cost Index. Construction costs have risen every year for more than a decade after falling in 2009 and 2010 in the wake of the Great Recession, according to the index.

Taylor said the Boston market is positioned favorably compared to other cities, as it has strong economic drivers, and developers haven't overbuilt in recent years. 

“One of our good problems is that we never have oversupply,” Taylor said. “You’re not going to get these dramatic shifts in prices, but the way I look at it, we are in the best place one could be.”

Samuels & Associates President Joel Sklar said Boston has had one of the hottest markets for development in the past 10 years. Sklar said construction and land costs have made it harder for site selection and development even though the market has seen a lot of activity.

“It’s been a challenge to get to green lights on deals because of the cost,” Sklar said. “If someone handed me a project that was ready to go and I had to close on it, I don’t think that’s happening.”

The firm has been active in Fenway, with multiple big developments shaping the neighborhood, including its Fenway Triangle development and its proposed 1400 Boylston Development that was filed in December. Sklar said he doesn't think construction costs will drop, but he does think that a slowdown in growth is inevitable.

“Whether we like it or not, it is cooling down,” Sklar said. “I don’t know if we have a choice in that, and clearly costs need to come down. For the last 10 years, that was gold, but today I think there’s going to be a bit of dislocation for a while before the numbers work.” 

Yali Wang, managing director at Manulife Investment Management, which has over $500B in assets under management globally, said that she has seen more deals fall through due to headwinds in the market. 

“From the development side, we are seeing that we have a lot of broken deals now coming back at us. We have opportunities that we were not selected for coming back to us,” Wang said. 

Procopio Cos. CEO Mike Procopio, whose firm develops multifamily housing in the suburbs of Boston, said that this type of slowdown isn't new in the industry and that it is just part of the job. He said the uncertainty will eventually subside and deals will begin to happen again. 

“We may not like the rates and the terms, but I think we will start to see deals getting done,” Procopio said. “If you look at the chart of federal loan rates from the '70s and the '80s, there’s lots of peaks and lots of drops, but it never stays in one spot. We are feeling a lot of pain. Let’s be honest with each other, it’s really bad — but it will pass.” 

Procopio said the only thing to do is to continue forward, a trend familiar to veterans in the industry who have been through multiple economic downturns. 

“Housing has always been built in good times and bad times.” Procopio said. “The show will go on.”

Brian Salyards, executive director at PGIM Real Estate Finance, said lenders have become more conservative as costs have risen. Making a personal prediction, he said that the market might remain in a cooldown for at least the first half of next year.

"It’s getting more and more challenging to get conviction behind some of those deals that are trying to get done,” Salyards said. “Next year, we are gonna do a lot of fishing and golfing.”