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For now at least, no tax breaks to jumpstart stalled housing, Wu says

City has decided tax incentive is too expensive, for now.

A new apartment building under construction along Bremen Street in East Boston.David L. Ryan/Globe Staff

Beleaguered residential developers had been hoping they’d get good news in Boston Mayor Michelle Wu’s State of the City address Tuesday night, in the form of a tax break to help jumpstart construction of stalled housing projects.

Those hopes will remain unfulfilled for the time being. Wu told reporters after the speech that a housing tax break is off the table, at least for now.

As it grapples with a massive housing shortage, the city of Boston has more than 23,000 proposed units that have won city approvals but have not broken ground, largely due to rising interest rates and construction costs that effectively made them too expensive to build.

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In September, Wu floated the idea of a “time-limited tax incentive program” to take those units from the pipeline into the ground; city officials and local academics have studied the idea since.

Details were scarce, but it was expected a tax break could lower city property taxes to help ease those costs for projects looking to start construction this year and next. Many in Boston’s real estate development industry had hoped for more formal news on an incentive program at Tuesday’s State of the City speech, particularly as the region faces what could be a prolonged slowdown in housing construction.

There was no formal news on incentives in the speech, but Wu discussed the topic with reporters afterward. She said that, after studying what it would take to make projects financially viable, city officials identified just shy of 7,800 approved market-rate apartments that could use a targeted tax abatement. But right now, Wu said, the gap between what the city can provide and what projects need is too great.

“We have spent a tremendous amount of time and energy really engaging with the real estate community, with academics, with just about every source of data, to understand the financials and what it would take to get our pipeline going,” Wu told reporters. “The scale of resources that it would take to close the gaps, to make these projects actually move forward — and at scale, to start to bring rents down — is simply not something that the city could afford.”

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Boston Mayor Michelle Wu during her State of the City address Tuesday night.Danielle Parhizkaran/Globe Staff

The city will keep an eye on economic conditions, including federal interest rates, and stay in conversation with developers about getting projects started, Wu said.

“We’ve gotten a pretty good idea of what it will take to really spark this next set of projects to move forward,” Wu said. “We’re not there yet, with where the gap is, but we’ll keep watching it.”

In June, Wu called her former professor, Harvard economics department chair Edward Glaeser to ask him to evaluate a possible tax abatement program. Glaeser put together a team of local economists to study potential impacts; the group submitted their report to the city on Wednesday. The city didn’t pay the team for the report, Glaeser said.

The report outlines a number of scenarios and their impact on both housing production and the city budget. An optimistic estimate shows a $2,500 per-unit annual subsidy over 29 years could create 649 units at the cost of $168 million in lost tax revenue to the city, the report said; the less optimistic estimate shows the same subsidy and time period could create 216 units, costing the city $68.5 million. A $5,000 per-unit annual subsidy over 29 years could create 1,077 units, but cost the city $326.1 million; the less optimistic view shows that break could create just 385 units at a cost to the city of $133 million.

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“Our analysis indicates that a residential tax abatement will not induce developers to fully unfreeze the pipeline of approved projects,” said the report, which Glaeser co-chaired with Harvard’s Denise DiPasquale. However, the report says, “there is a case for subsidizing new residential units if the mayor believes that the social benefit from affordable and market-rate units exceeds the cost of building.”

Developing housing in Greater Boston — either market-rate or affordable units — can cost around $500,000 to $600,000 per unit, and more on sites closer to downtown Boston. For many developers, what the city could reasonably provide in terms of subsidy wouldn’t be enough to fill financing gaps, Wu told reporters Tuesday.

Still, the loss of housing production incentives came as a blow to the city’s real estate development industry.

“The development community, particularly given the current market and the number of new regulatory requirements put in place in the city of Boston within the past two years, was hopeful that some incentive of some kind would be announced during the speech,” said Tamara Small, CEO of commercial real estate industry group NAIOP Massachusetts.

Construction work at the former Edward J. Sullivan courthouse and jail in Cambridge on Oct. 31, 2023. Jonathan Wiggs/Globe Staff

Greg Vasil, CEO of the Greater Boston Real Estate Board, said that while he applauded the move to legalize accessory dwelling units citywide, more still needs to be done to boost construction.

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“With interest rates and construction costs still too high, we are disappointed her administration is not pursuing the short-term tax cuts needed to spur residential housing development,” Vasil said.

Residential construction is facing a marked slowdown in Greater Boston this year. Just 502 housing units were permitted in the region in November, according to Census data, and 9,045 through the first 11 months of 2023. That’s down considerably from pre-pandemic levels; in 2019, the region permitted 1,389 units in November, and 13,579 units in the first 11 months of the year.

The sky-high cost of construction is a major factor in the delay of building approved residential projects, particularly amid an ongoing stretch of high interest rates. Those interest rates, as well as other cost factors — including expensive materials and parking minimums, extended permitting timeframes and affordable housing requirements — has many developers in the area pressing pause on new projects.

The Wu administration has already rolled out one short-term tax incentive program — to convert obsolete office buildings to housing — where qualified commercial property owners can receive a steep tax discount if they start work by next fall. At least three property owners have already applied to convert whole buildings, or floors of buildings, across downtown.

The housing production incentives program debate comes at a time of impending financial gloom for much of Boston’s commercial property base — which funds much of the city’s budget. Most of the city’s 20 largest office towers have declined in value since last year, the Boston Business Journal reported last week, citing city assessment data.

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If the value of a physical building has declined, its owner can petition the city to pay less taxes, a process known as applying for a property tax abatement. Small this week said she’s hearing more members than ever before discuss applying for commercial property tax abatements.

“Without a doubt, that’s definitely going to be something we see this year,” Small said.


Catherine Carlock can be reached at catherine.carlock@globe.com. Follow her @bycathcarlock.