Downtown Hartford is in the midst of a government-supported housing boom, with a second wave of development poised to takeoff around a proposed ballpark just north of the interstate. While this downtown housing approach follows the recent revitalization experience of many cities across America, the reasons, conditions and methods of state and city development funding are local, and need to be unpacked if we are going to understand where we should and may be headed.
Since World War II and until very recently, government has had a very unbalanced housing policy. Our American tradition favored suburban development for the middle class through the constant growth of our highway system and funded multi-family development for the less economically fortunate in the cities. Policies, conscious and unconscious, were designed around the experience of big cities like New York and Boston.
These large cities have strong housing markets and lots of high-paying jobs, which translate to high rents. In these communities the rents that can be charged are high enough to support the cost of construction. The only way to retain a working class in these communities is for the government to underwrite a portion of new building construction projects and in return require artificially lower rents and sale prices. These federal and state affordable housing programs aim to prevent gentrification and help create more economically balanced neighborhoods.
But, the more we artificially lower the rent/sale price to make affordable housing units, the harder it is to finance new construction.
In Hartford, and for most of the urban centers along the Connecticut River, rents are not high enough to support new development. These are weak market communities, where the median income is low, rents are low and the economy can’t support the cost of construction without a subsidy. Under these conditions affordable housing policies often have the exact opposite effect, creating concentrated pockets of poverty rather than economically balanced neighborhoods.
In a strong market, the sale or rental price of a building supports land, labor and material costs of new construction. Rents also cover financing costs and provide developers a profit. In a weak market, the sale price can’t support the cost of land, labor or materials, creating a financial gap. Unless the gap is filled, development stalls. As a result, government subsidies are required to help finance affordable housing.
In Hartford, where the median income is about $28,000, the necessary government subsidy to support new construction is pretty high. New construction is expensive in New England — upwards of $300 per square foot (PSF). So, for example, in Hartford, an 80-unit apartment building might cost about $30 million, but with existing rents and home values it will only be worth around $22 million when finished. This $8 million price difference is a financial gap between what it costs to build the building and what you can rent/sell it for in Hartford. If you use a bank loan to finance your project this gap grows even larger, requiring further government assistance.
This funding gap often prevents development from moving forward. The only alternative until recently has been to use affordable housing money. Every project then becomes an affordable housing project and the concentration of poverty just keeps growing in our weak market cities. Maintaining this housing policy will never attract a grocery store or quality retailers to our urban centers.
To fix this situation, we need to raise the incomes and fortunes of those who already live in the city and bring back the suburbanites, young and old. If we are to accomplish that we need a balanced housing policy that supports housing development, without income restrictions.
The state has led the first housing boom, working through the Capital Region Development Authority (CRDA) and has taken a step in the right direction. With limited funds leveraged at a 3-to-1 ratio, CRDA is pursuing about a dozen downtown housing projects. Each project has needed a subsidy. CRDA money finances the funding gap, creating projects with 80 percent market rate and 20 percent affordable housing units, which is a better balance than all affordable or all market rate.
The second housing boom is centered around the proposed ballpark in Downtown North. The developers, Leyland Alliance and Centerplan, are clearly taking a risk and I applaud them for having the vision to develop a neighborhood. Their housing study, however, says there is a housing market opportunity at the same rents as the CRDA projects, but without any government subsidy.
As part of the deal, the developers are getting the developable land virtually for free, and the city is not requiring any affordable housing. These conditions should improve the project’s finances by lowering the costs to build and raising the rental revenues.
However, given the size of the financing gap for multi-family housing in Hartford, nearing 40 percent of costs in some instances, its seems very unlikely that the DoNo housing projects can be built without a subsidy. The siting of the ballpark does not change the market fundamentals and no one wants to be sitting here three years from now asking taxpayers to come up with more money to subsidize the housing.
It’s highly likely that these units will require a subsidy, and if so city officials must call for a balanced housing policy combining market rate and affordable units before they approve the development.Â
David Panagore is the former chief operating officer of the city of Hartford.
