Posted 5 days ago

WHY ARE RENTS GOING UP EVERYWHERE AND IN WORCESTER IN PARTICULAR

Here is a recent Worcester Business Journal Article where I was referenced. Enjoy the read and some additional thoughts.



Worcester’s rental market is catering to a high-income tenant, which could be bad news for local workers

https://www.wbjournal.com/article/worcesters-rental-market-is-catering-to-a-high-income-tenant-which-could-be-bad-news-for?fbclid=IwAR1t5_BNFxuMBO1PaUW6AM64QFNba-Vrdt0MEM_tf9-wSQA3p1aG49AhIbI

This is a wonderful headline, but it doesn’t quite reflect the content of the article (see link above). There is a reference to Luxury here but that isn’t the real issue being discussed, as there are limited “True Luxury” apartments in Worcester. The issue is that rents and housing prices are rising faster than wages for most people in Worcester. The people who live East of Worcester are moving to Worcester as they see it as a value over places like Marlboro/Hudson and Natick/Framingham. Tenants want to believe that the reason rents are high is because the apartments are luxury apartments. They are calling for INSTAGRAM worthy apartments and Landlords help them out by improving units to a certain level.

Here is a short list of factors that have caused overall rents to go up everywhere, and Worcester in particular.

  1. Low interest rates- In 2019 average interest rates for 30-year mortgages were just under 4%, in 2020 they were around 3.25% in 2021 rates ranged between 2.75% and 3% for almost the entire year. This is significant because it allows buyers to buy more house for the same amount of money and create a creep in housing prices. We saw this with the average price of multifamily homes going up significantly over the past few years. When prices go up for multifamily, then these landlords need to increase rents.
  1. Increase in HUD Fair Market rents which are used to calculate what Section 8 will pay for an apartment. Here is a quick snapshot.

Year

studio

% Change

1BR

% Change

2BR

% Change

3BR

% Change

4BR

% Change

Average % change

2017

$745

5.2%

$839

-0.2%

$1,060

-0.2%

$1,326

0.6%

$1,466

-1.1%

0.9%

2018

$850

14.1%

$942

12.3%

$1,192

12.5%

$1,494

12.7%

$1,654

12.8%

12.9%

2019

$864

1.6%

$946

0.4%

$1,202

0.8%

$1,506

0.8%

$1,632

-1.3%

0.5%

2020

$1,013

17.2%

$1,100

16.3%

$1,398

16.3%

$1,742

15.7%

$1,894

16.1%

16.3%

2021

$1,063

4.9%

$1,134

3.1%

$1,450

3.7%

$1,804

3.6%

$1,966

3.8%

3.8%

2022

$1,103

3.8%

$1,162

2.5%

$1,491

2.8%

$1,843

2.2%

$2,022

2.8%

2.8%

As you can see rents are going up for Section 8, the 3 BR unit that was $1,326/month is now $1843/month that is 39% increase in rents in 6 years. But you will also see that the big rental increase that happened from 2019-2020 of 16.1% coincided with the beginning of the increase in prices of multi families. Once again, when Section 8 raises rents, everyone else follows.

  1. The Dual Tax rate in Worcester. The city charges different rates for Commercial and Residential properties puts an unfair burden on homeowners. The 2022 tax rates are. $15.21 per $1000 for Residential and $33.34 per $1000 per Commercial and industrial. This would seem to be the opposite, but it is a real problem for homeowners. When Commercial rates increase, owners of these buildings do not have the incentive to develop commercial properties and increase their values, they actually have an incentive to move to other communities with lower tax rates. This has put a big drain on the commercial tax base in Worcester. The ratio of the value of commercial properties to residential properties has gotten so bad that now 77% of the value of all properties in Worcester are residential. Yet they only pay 59% of the taxes. If this keeps up, we will continue to see the drain of commercial entities leaving Worcester. What is happening is that we are driving the businesses out of Worcester and soon we will only be left with Residents to pay the taxes. Here is a link to an audio clip where I discuss some of the aspects of this problem.

https://soundcloud.com/worcesterchamber/11-3-21-pt-1-worcester-tax-classification-w-tony-economou-brian-allen

When commercial taxes are high, then all the investment money goes into residential multifamily housing. This raises the prices of these buildings, and in turn raises rents to pay for this. If commercial taxes were more equitable then more money would flow to commercial real estate, increase the commercial tax base and in turn taxes on residential properties would go down.

Here is another article from almost exactly a year ago.

https://www.telegram.com/story/news/2021/01/10/worcester-property-owners-weigh-burden-skyrocketing-values/6572360002/

You can see the dilemma the owner of this 3-decker is in. Values on properties have gone up, so taxes have gone up and they need to pass those along to their tenants in terms of increased rents. They feel bad asking for increased rents.

The irony of this story is that these owners have decided to cash in and sell their 3-decker at 71 Francis Street, which is currently on the MLS for $650k

  1. Tenant Expectations. My first apartment out of college (1993) was the 3rd floor of a 3 decker in Main South. It came with the following amenities:
  2. Drafty old windows that shook and let the wind in
  3. Chipped and pealing lead paint everywhere
  4. No off street parking
  5. A clawfoot tub with a weak showerhead and 3 curtains that closed in on me when I showered
  6. A steam heating system that was unreliable at best
  7. $450/month for 3 BR

I was happy to have a cheap place and I went to work every day anyway. Now with Covid, Tenants spend lots of time in their apartments, and post lots of photos on Social Media about how nice their places are. If Landlords don’t provide this, they will not get any tenants.

Who is to blame for rising rents and rising home prices?

Sadly, I think the answer is our Government, Elected officials and college admissions officers.

  1. The Federal Reserve (FED) controls interest rates. Yes, it is not that simple, but the 30-year mtg rate, tracks the 10 year treasury bond. To keep the economy moving and to address issues with COVID the FED bought bonds on the open market and reduced the discount rate at which banks borrow money from the Federal Reserve. This caused rates to fall which in turn drove up asset prices like housing.
  1. HUD sets the market rates for apartments. And yes, that is just for Section 8, but this influences the overall prices for apartments. It sets a benchmark and expectation for Landlords on what they would like to get for rent. Buyers of multi-family housing base their purchase prices on what they expect to get for rent over time.
  1. The Worcester City Council sets the Tax Rates for Residential and Commercial/Industrial. They have the opportunity each year to make it more equitable and send a message to the business community that they will act fairly. This year the council (lead by councilor Khrystian King) made a bold first step to make Worcester more Business Friendly and I thank them. If they can close this gap, it will only help the City in the long run
  1. The College Arms Race. Colleges needed to differentiate themselves from others, and the easiest way is to have better Athletic Facilities and Dorms. It is very hard to go from a beautiful dorm apartment to the one I described above.

Did the government and the colleges do this on purpose? Did they intend to hurt us?

I doubt it, but actions have consequences and Government policies have led to the situation we now find ourselves in.

How can we solve this?

The easy answer is to create more housing units so that prices will fall.



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