The housing market is in a state of flux. And the mechanisms that can be used to combat it, such as development incentives and subsidies, are in critical need of a boost.
Worcester is rapidly expanding, with 25,000 more residents expected between 2010 and 2020. During the same time period, the city constructed 10,000 new housing units, but this was insufficient to keep up with the city’s rapid population growth.
Real estate developers, many of whom are from outside the city, are the driving force behind the construction of new dwellings. In the last few years, developers have invested billions of dollars into Worcester, yet despite this, there are still substantial gaps in the development of both market-rate and affordable housing.
Development incentive schemes aim to jumpstart projects that would not be possible without some form of financial assistance or tax exemption. The Housing Development Incentive Program, for example, needs to be expanded to give developers the tools they need to add enough new units to the housing stock.
HDIP is a Massachusetts Department of Housing and Community Development initiative that gives private developers a small stipend to help them build market-rate housing in Gateway Cities.
The 26 mid-size Massachusetts cities west of Boston, known as Gateway Cities, often have significantly more cheap housing alternatives than other communities in the state, but they lack the market-rate housing creation needed to support their economy. Many suburban areas are considerably below the state-mandated criteria for the percentage of their housing stock that is affordable, while Gateway Cities frequently exceed it. Worcester, the largest Gateway City, and its surrounding villages are examples of this.
The pandemic’s health and economic effects have been disproportionately felt in Gateway Cities, which have historically been hotbeds of poverty and racial inequity. To make matters even more difficult, because rents in Gateway Cities are lower than in major metro areas, developers may have difficulty calculating their return on investment. Construction cost escalation has only aggravated the problem.
HDIP assists Gateway Towns in attracting new developers who would otherwise be unable to construct in their cities.
A tax increment exemption agreement, in which a municipality grants a developer partial forgiveness for new taxes on a constructed property for a set period of time, and a tax credit issued by DHCD are the two components of the program. However, because the program is currently set at $10 million per year, only six projects statewide receive a tax credit each year.
Despite its severe limitations, HDIP has given $42.8 million to 35 real estate projects since 2014, resulting in the creation of almost 2,000 housing units in 14 locations, including Worcester.
As a result of the developers’ ability to leverage alternative financing, DHCD has seen a 12-to-1 return on investment for the HDIP program. It has had an impact that is tenfold greater than the public cost of the subsidies, while being a relatively small program.
The El at 100 Wall St., Edge at Union Station, Kelley Square Lofts, Elwood Adams Apartments, Chatham Lofts, Madison Properties’ two apartment buildings near Polar Park, SilverBrick Skyhouse at downtown’s Commerce Building, Mission Chapel on Summer Street, and Alta Seven Hills, which is being built on the site of the former Mount Carmel Church, are just a few of the projects that have signed TIE agreements with HDIP. All of the projects are either new construction or restorations of historic structures.
HDIP will bring $365 million in investment to Worcester, representing 1,279 units of rental housing that would not have been built otherwise, creating tens of millions of dollars in new tax revenue.
The chamber is working hard with other Gateway City leaders around the state — all of whom are enthusiastic about HDIP — to ensure that the program’s annual cap is increased to fund new projects. The program currently has a statewide backlog of dozens of projects and more than $57 million in stalled expenditures.
Housing of various types, including market-rate and inexpensive rental housing, is also crucial, according to the chamber. The chamber has backed initiatives to incorporate a requirement in TIE agreements that a specific percentage of units in approved projects be income-restricted affordable housing.
Now is the moment to provide communities and developers with the tools they need to combat the housing problem, and HDIP can be one of the most effective tools available if done correctly.