Note to reader: There has been a lot of talk recently in Watertown about the need for more affordable housing. One thing everyone in Watertown can do to help build more affordable housing is to attend the City Council Meeting on 4/11 at 7:00 PM and voice their support for proposed linkage fee ordinance that would raise money for affordable housing by applying a modest fee to new large non-residential developments in the city. While there is some debate about the exact fee amount (below is a copy of our letter to the City Council outlining the case for a $15/sqft fee), the most important issue to make sure the linkage fee is implemented as soon as possible, so we do not lose out on any more funds for affordable housing.
Dear City Council President Sideris and City Councilors Gardner, Feltner, Piccirilli, Izzo, Airasian, Bays, Gannon, and Palomba:
We applaud the City Council’s efforts to promote affordable housing, first by establishing the Watertown Affordable Housing Trust and now by working with our state delegation to establish a linkage fee to directly fund affordable housing development. As the council considers enactment of the linkage fee, we urge the council to adopt a linkage fee of $15 per square foot, which our technical analysis below shows is in line with recent increases in residential construction costs not measured by the original Nexus study published last year.
The Nexus study published last April recommended the council consider a linkage fee in the range of $9.44 to $11.12, which balances raising revenue for affordable housing while maintaining Watertown’s competitive position in the commercial (mainly focusing on life sciences) development space. White the study methods that reached this range are sound, the data used to estimate costs in the study is incomplete. The Nexus study (on pg. 31) used data from “Massachusetts Housing Partnership permanent loan closings between Fiscal Year (FY) 2016 and FY2020 (FY ending June 30),” which fails to account for the sharp increases in construction costs between 2020 and 2023. According to the Bureau of Labor StatisticsProducer Price index, the cost of multifamily residential construction has increased 30% since June 2020, and the cost of single-family residential construction has increased by 35% (Figure 1). In addition, according to the Watertown Assessor the assessed value of residential property has increased 12% since 2020, increasing the costs of land acquisition (Table 1). Taken together, these price increases increase the cost of development by $45.8 million, or approximately 29%. Simply adjusting the Nexus study development values to account for these cost increases yields a linkage fee range of $12.18 to $14.35.
In addition to increased development costs, the rapid increase in interest rates over the past year also decreases the sale price of affordable units. As an example, the Nexus study calculated that a MHP One Mortgage at a 4.50% interest rate would yield a sale price of $352,834 (pg. 53) for a Middle Income 2-Bedroom unit. At the current MHP One Mortgage rate of 5.70% that price decreases to $321,400 to keep the mortgage within the affordable monthly payment for a middle-income unit (Table A-4 and Table A-4 Updated). Overall, increased interest rates decreased projected sale revenues by $4.1 million, or approximately 9.73%. Adjusting the linkage fee for this decrease in revenue yields a linkage fee range between $13.37 and $15.74. Therefore, a $15 linkage fee sits comfortably within this range, capturing most of the revenue needed to offset rising construction costs and increased interest rates while still leaving room for the fee to grow with inflation.
While this range is nominally higher than the $11.12 value quoted by the Nexus study, it is still a small cost compared to overall laboratory rents in Watertown. Following the Nexus study’s methodology for estimating the linkage fees on lab rents (pg. 47), amortizing the $15/sqft linkage fee over a standard 10-year commercial lease results in an annual increased rent of $1.15/sqft, or 1.7%. For reference, according to CBRE, over the last year (Q32021 to Q42022) lab rents in Boston/Cambridge increased by $3.69/sqft and by $9.91/sqft in the suburbs, so at a 10-year amortized cost of $1.15/sqft, the proposed $15/sqft linkage fee is less than even one year’s increase in asking rents, making it unlikely that the linkage fee would decrease Watertown’s competitiveness in the laboratory market.
The affordable housing shortage is one of the most pressing issues for our city, and it threatens to stall our region’s economy. We applaud the Council’s actions to tackle this crisis by instituting a linkage fee, and we strongly encourage the Council to adopt a $15/sqft fee to ensure that the city’s efforts to develop more affordable housing in Watertown are not eroded by inflation and rising interest rates.