Will Building More Market Rate Apartments Increase the Affordable Housing Stock?

Banker & Tradesman published an article on March 26, 2023 asking "Can Massachusetts Build Its Way to Affordability?". In short, they believe the answer is yes and that more market-rate housing will actually by itself create more affordable housing.It's a commonly-held belief that the construction of market-rate apartments increases the rent in the area where they are built. Existing landlords, it is thought, see how much new units are going for and hike their rental rates, which results in higher rents for older, possibly less well-maintained, units. Another commonly-held belief is that the construction of affordable housing depresses value in the area where it is built, as there is a conception that affordable housing brings with it poverty-related issues such as crime, drugs and violence.This may be a twentieth-century perspective. Low-income public housing was historically built in already economically depressed areas or in otherwise-unoccupied areas of vacant land. Low-income housing also used to be built as large tower blocks (the Cabrini Green project in Chicago springs to mind), where only very low-income people lived in high density with no support services on-site and poor transit infrastructure.In the twenty-first century, many large "projects" of low-income housing (including Cabrini Green) were demolished and new construction tended to be less-dense and less confined only to those considered low or very-low-income; i.e. those earning less than 60% of the Area Median Income are considered low income and those earning less than 30% of the Area Median Income are considered "very low income" and are usually not working for that income. Many states such as Massachusetts encouraged mixed-rate housing development. That meant that in a new housing development (be that a blocky apartment building or more dispersed townhouses), some percentage of the units would be reserved for people earning below the AMI and the rest would be market rate. Developers got preferential treatment and lower-interest loans if they included affordable units in their new builds.And what happened in the neighborhoods? Several studies published since 2000 have shown that building market-rate units actually helps with the demand for affordable (but not subsidized) rents in their neighborhood.The Upjohn Institute in 2019 and the Hudson Institute in 2017 both found that increased availability of market-rate or luxury units actually has a "filtering up" effect that results in more affordable units becoming available as local renters who can afford to do so upgrade their apartments by moving into the newer, more expensive units, leaving their old and now less-desirable units available for renters with a tighter budget.Similarly, a 2021 study by Redfin found that low-income housing developments had either no effect or a positive effect on housing resale values in the immediate area of the development.   Living in a socio-economically diverse neighborhood (or "economically integrated" neighborhoods as they are sometimes known) is beneficial for everyone along the income spectrum. Lower-income children in economically-diverse neighborhoods have better physical and mental health and are more upwardly mobile economically.For the people earning more, it can change their perceptions of poor people - unless the spread of incomes is too great, according to an interesting Urban Institute panel.  Their recommendation was to build more middle-income market rate units, rather than so many "luxury" units.                           However, as the Urban Institute notes, the return for developers is on luxury units. UI asks, what cangovernment do to incentivize new building that contains units that are market-rate but affordable to middle-income earners?

What Does "Affordable Housing" Actually Mean?

According to the Office on Housing and Urban Development (HUD), housing is considered affordable if it costs 30% or less of what the renter/homeowner earns, utilities included. Many people pay 50% or more of their income to housing costs, which makes them fall into the "housing burdened" category, and means they have little discretionary income to use on savings, retirement, or entertainment, which helps support the economy.Affordable housing may bring up images of public housing "projects", but more often "affordable housing" refers to rental units that are part of a privately-owned apartment building or multi-family. There are also some homeownership models that have deed restrictions to preserve permanent affordability. In this model, the income restriction applies at time of purchase, but the owner may later exceed the income limits with no penalty.Because the most common model of affordable housing is one or more rental units restricted to affordable levels, that is what we’ll look at here.There are tax credits and lower interest loans available to developers who create affordable units within a housing development and some towns may require that some percentage of units (often 10% - 20%) be made "affordable." The rules and regulations about zoning and tax credits are extremely complex and not what we are covering here, but anyone interested in Massachusetts' rules can find information about the Low Income Tax Credit (for developers creating units reserved for those earning up to 40% of the AMI) here and about affordable housing development here. So nestled into a large apartment building may be several apartments that go for a far lower rent than the others.The rent considered affordable is based on the Area Median Income (AMI), which is defined annually by HUD (in mid-April). Generally, “affordable housing” is available to people/households that earn up to 80% of the AMI. Some affordable housing is restricted to those earning up to 60% of the AMI. The median income varies a lot by region in Massachusetts. Some cities have their own AMI and others are regional (by county or by Census area)For example, the FY22 Boston/Cambridge/Quincy area was $140,200 per household.

So for the many, many towns in the greater Boston area, a family of four earning $111,850 is eligible for affordable housing. And the “affordable” rent for that family of four earning 80% of the AMI would be $2,908 per month for a fully privately owned/developed unit. Development that used 40B funding is slightly different and the cap on the rent for a 40B-funded three bedroom unit would be $2,552 per month.

Wellesley, one of the towns in the Boston/Cambridge/Quincy market has a median rental cost of $4,500 for a three-bedroom, so the $2,908 “affordable” rent is certainly less than market rate, but still not what many would think of as “affordable”. For Boston itself, the median rent for a 3 bedroom is $3,222, and in Quincy, it is $2,600 – less than the rent set for those earning 80% of the AMI.So "affordable housing" really means housing costs that are 30% or less of a household's income. Many in Massachusetts wish that there was more of it, so that MA residents could spend their income in other areas besides just shelter.Several current projects include a percentage of affordable units (due to either a shortage of such units in a municipality or the advantageous financing of projects that contain affordable units, even if the municipality has "enough" affordable units). One such project is the new mixed-use development underway at the former Court Square Hotel in Springfield. The once grand hotel and opera house has been vacant for decades. It is being redeveloped to contain 59 market-rate apartments and 12 "workforce apartments" that will be restricted to those earning up to 80% of the AMI, or $73,300 for a family of four, as of the FY22 HUD AMI limits: The favorable financing that comes with the affordable units helps the developers' bottom line. The full cost of the project is budgeted at $49 million and includes financing from the city and state.The architectural rendering shows what the completed facade with apartments on upper levels and storefront retail, including a restaurant that will be run by the prominent Lee family of restauranteurs.