‘The numbers should work, and they just don’t’: Is Cambridge’s affordable housing rule backfiring?

Cambridge is one of many local communities that require most new housing developments to include units set aside at below-market rents — in its case, 20 percent of the building, which is among the highest rates in Greater Boston — with the intention of creating more affordable homes in a city that is starved for them.

But housing is so expensive to build right now that some developers say that this so-called inclusionary housing requirement may be backfiring, making otherwise profitable projects too costly to build and stopping them before shovels hit the ground. Put another way, a policy aimed at generating affordable housing may actually be preventing it.

“The simple reality is that the math of the inclusionary policy is preventing development,” said Daniel Sibor, managing partner of North Cambridge Partners. ”The project we’re doing is one where the numbers should work, and they just don’t.”

Inclusionary zoning is popular among many Greater Boston municipalities for the simple reason that it can generate affordable homes with no public money. At least half of the cities and towns in the area have some form of inclusionary zoning on the books, according to the Metropolitan Area Planning Council. Together, they’ve created thousands of income-restricted apartments.

But lately, amid soaring costs for building materials and higher interest rates, developers and some local officials wonder if those policies might be doing more harm than good as they are currently written. And now some communities are evaluating whether to dial back their requirements in hopes of kicking construction back into gear.

It’s a tricky balance. Cities like Cambridge, Boston, and Somerville have increased their affordable housing requirements in recent years, leveraging their hot markets to create much-needed affordable housing. The prospect of lowering that requirement feels perverse, even if it may be a practical solution to generate more units.

“We have a desperate need for affordable housing, and inclusionary [zoning] is our greatest tool for delivering it,” said Ellen Shachter, director of Somerville’s Office of Housing Stability. “Changing it would have to be a last resort.”

Cambridge first passed its policy in 1998, mandating developers set aside 15 percent of units in projects 10 units or larger at rates that are affordable to people making 80 percent of the Area Median Income (or roughly $130,000 for a family of four) or less. In 2018, amid the pre-COVID real estate boom, the City Council hiked that to 20 percent.

And it worked. Since the 1990s, the program has created just shy of 1,600 units of affordable housing in Cambridge and developers were still building projects under the 20 percent requirement for a few years after it went into effect.

Then came 2022, when the economy of building homes in the United States began to shift. Materials costs soared, and interest rates more than doubled. Not only did those changes reduce builders’ profit margins, they also made investors more skeptical of the return on investment from housing, so they began demanding higher margins to finance projects.

Altogether, those factors dramatically increased the cost of building homes. And while setting aside 20 percent of a project’s units at below-market rents may have been sustainable three years ago, it is a lot harder now, said Sibor.

The project at 2400 Mass. Ave. helps explain why. With 60 condominium units, North Cambridge Partners figured their project would generate about $108 million in sales if all the units were sold at market prices, said Tim Rowe, the developer’s lead investor, who is also the founder and CEO of the Cambridge Innovation Center. But with 12 of those units sold at far-lower “affordable” prices under the city’s inclusionary rule, that amount drops to about $90 million.

The developers figure they’ll sell the market rate units at somewhere around $1,500 per square foot, or perhaps a bit less. That’s a very steep figure, one that’s partially driven by high construction costs and the need to offset the discount on the affordable units. The price for affordable units, under the city’s rules, would come in closer to $275 per square foot.

Rowe estimates the six-story, 72,000-square-foot building would cost $85 million to build, leaving the developers with $5 million in profit. But to come up with that $85 million to begin with, they’d need to find an equity investor willing to put up about 35 percent of the money — $30 million — and then borrow the rest. The investors the developers have talked with about financing the project are seeking such a high rate of return that the project would need to net roughly $16 million, Rowe said, $11 million more than what the developers currently project to make.

In other words, the $18 million the developers would lose on the inclusionary units, even with the market rate units set at luxury prices, is quite consequential.

“It’s lots of fun to say [expletive] capitalism and [expletive] developers, but we rely on developers to build the city, and in order to do that, they have to make money to pay the people that fund the projects,” said Patrick Barrett, a Cambridge zoning attorney. “Right now, you’ve got a bunch of different social interests digging into the bottom line of a building.”

That’s a big reason, Barrett and others say, why housing production in Cambridge has taken a significant dip over the past three years. Between 2011 and 2021, builders in the city broke ground on an average of 790 units annually. That number dipped to 491 in 2022, and 404 in 2023. In 2023, developers only finished construction on 39 units, according to city data.

Still, there is far from universal agreement that the inclusionary policy is to blame for the slowdown, or that it needs to be changed.

City Councilor Jivan Sobrinho-Wheeler said he would not support lowering the requirement because it has been the city’s top driver of affordable housing production. Instead, he said, the city could consider creating a sliding scale that ties the share of units required to the size of the building.

“This policy has created thousands of affordable homes for people in our city,” he said. “I don’t think we should just drop the requirement because a couple of developers complained.”

Affordable housing math has emerged as an issue in the mayor’s race in Boston as well, after two of the slowest years for new development since 2011. Mayor Michelle Wu last year pushed the requirement from 13 percent to 17 percent with an additional 3 percent set aside for Section 8 voucher holders last year. As in Cambridge, many developers say that has made building more expensive at a time when projects are struggling to pull together financing. Challenger Josh Kraft has proposed dialing back to 13 percent, which he says will unlock stalled projects.

The Wu administration says the rise in construction costs and interest rates are responsible for the slowdown, not the inclusionary policy.

Either way, it’s a vexing challenge, said Cambridge City Councilor Patricia Nolan, because it is broad changes in the economy that have changed the math of building for developers.

When Cambridge first studied raising the requirement to 20 percent in 2016, it showed that projects could still pencil out. Now many don’t. The city can’t control the economy, Nolan said, but it can control the affordability requirement. If it wants to see more affordable housing built, lowering the policy may be the only effective lever to pull.

Nolan filed a policy order last week that proposed the council study altering the affordable housing requirement.

“20 percent of zero is still zero,” said Nolan. “I’d rather have some affordable housing than none.”

Andrew Brinker can be reached at andrew.brinker@globe.com. Follow him @andrewnbrinker.