Critics say Boston’s inclusionary zoning hurts construction — does it?

The task of keeping housing affordable for Boston residents and producing enough of it to meet demand is a constant balancing act.

One important piece of addressing the former is inclusionary zoning, which requires new, multifamily housing projects to set aside some of their new homes as affordable housing restricted to residents with low incomes.

But this year, inclusionary zoning has seen an unusual spotlight, even becoming a hot topic during the Boston mayoral campaign. That’s because one year ago, in October 2024, Boston increased the required percentage of units, decreased the maximum income level and reduced the minimum number of units in a project that would trigger the rules.

Since then, developers have increasingly said it makes creating new housing financially infeasible.

A year on, it’s still tough to say what effect the policy has had — and the answer is complicated.

“Each housing development is different and will accommodate different amounts of inclusionary housing, because it’s a matter of the strength of the market in which the housing is being developed,” said George McCarthy, president and CEO of the Lincoln Institute of Land Policy, a Cambridge-based nonprofit research foundation. “It’s a matter of what else is going on around it and the quality of demand. And not just the current demand, but future demand.”

What is inclusionary zoning?

Boston has had some form of inclusionary zoning since 2000, when then-Mayor Tom Menino introduced what was, until recently, known as the Inclusionary Development Policy. In 2023, Mayor Michelle Wu implemented a new Inclusionary Zoning policy to increase the required percentage of units and lower the maximum income level, which went into effect last year.

Inclusionary zoning can be found across the country, though the details vary from jurisdiction to jurisdiction. In some areas, including Boston, developers may choose instead to pay into a community fund that supports local housing initiatives or even to build the required affordable units at another location. In others, the inclusionary units are optional, but builders who opt in become eligible for tax breaks or other incentives.

“Without inclusionary rules, the private market is just going to develop stuff that is most lucrative for the market itself, but isn’t necessarily what we need to accommodate our families, our economies, the local population,” McCarthy said.

Under the current rules, Boston development projects with seven or more units are affected by the policy, and must set aside 17 to 20% of the total units as affordable, depending on the size and type of project. For most rental projects, the average maximum income level must be 60% of the area median income, and for homeownership projects, the units must be a mix of 80% and 100% AMI limits.

For large rental projects, 3% of the inclusionary units must be set aside for tenants with housing vouchers.

Boston’s requirements are fairly aggressive, when compared to many other places with inclusionary zoning. In data compiled by the Grounded Solutions Network of jurisdictions around the country with inclusionary zoning programs, 268 out of 733 had any requirement for 20% or more units set aside.

Housing Chief Sheila Dillon said Boston is doing everything it can to increase the affordable housing stock, and inclusionary zoning is just one part of that effort.

Most of the affordable housing that the city supports directly is aimed at very low-income residents, while the units produced by inclusionary zoning are targeted at middle-income households who are still unable to afford market-rate homes.

“We invest land, we invest properties, we are funding very large pipelines of good income-restricted housing, both homeownership and rental. And so the city does everything we can with our resources to fund and supplement the creation of affordable housing,” Dillon said. “We also are relying on the market to provide income-restricted housing … but it’s all really important.”

Barriers to development

Boston residents have generally been in support of efforts to create more affordable housing. But when Wu proposed the changes to Boston’s inclusionary zoning — a central promise in her first mayoral campaign in 2021, and one of her first efforts when she took office — it was immediately unpopular among many in the real estate and development communities.

The central complaint, then and immediately, is that the requirements cut into the financial returns developers can make, which can turn a project from an easy win to completely infeasible.

The financials of a development project are planned out very carefully, with detailed estimates of how much construction will cost per square foot or by unit, and how that will compare to the revenue it will eventually bring in from monthly rents or home sales. The expenses are the same for an inclusionary zoning unit and a market-rate unit, but the inclusionary unit will typically bring in much less money once operational. Developers have to make up the difference by decreasing the cost of the land or construction or by increasing their future revenue.

Even if they still make some profit, if their predictive models show too thin of a margin, developers say they may be unable to secure investors.

• Read more: Mass. needs more affordable housing; So why don’t developers build more?

Some developers who spoke with MassLive said last year’s changes to inclusionary zoning have made it near-impossible to build in Boston, despite the city’s stated goals of increasing its housing stock to bring down prices and help struggling residents.

In a March City Council hearing, Planning Chief Kairos Shen said developers had told his department that easing affordability requirements could spur more construction, but he had not heard any specific requests to waive or reduce the requirements.

“My understanding is the current capital market constraints and high cost of construction, a change in the inclusionary development approval will not make the difference between whether the project can move forward or not in this current economic condition,” Shen said.

During the mayoral campaign, Josh Kraft, Wu’s leading opponent until he dropped out of the race in September, made inclusionary zoning the central point of his housing policy, recommending the increased requirements be rolled back, at least until the market stabilized.

“Twenty percent of nothing being built is nothing,” he told MassLive earlier this year, while still in the race.

“When we get those things cranked up, who knows? Maybe you can increase that 13% up a point or two or three as the economic climate changes and as housing is produced,” he said, referencing the 13% set-aside requirement that preceded the current rules.

Others argue that for development that does happen, inclusionary housing requirements will push up rent or sale prices for the market-rate units in order to offset the losses from the income-restricted units.

McCarthy, however, said this “myth” was “baloney.”

“That suggests that developers, when they put market-rate units out on the market, are willing to take less than the market will bear because they could voluntarily just push it up, but they just choose not to. I mean, what are they, being beneficent?” he said. “They’re going to charge whatever they can get.”

Experts differ on IZ’s effects

Expert opinions on the actual effects of inclusionary zoning on the rate of development vary, and economic research on the subject is exclusive.

In one of the few studies that has analyzed the issue, researchers at the Mercatus Center at George Mason University looked at inclusionary zoning policies in the Baltimore, Maryland and Washington, D.C. region and found evidence that while jurisdictions with inclusionary zoning did not see less development, they did see housing prices increase more over time than in neighboring jurisdictions without those requirements.

For every year that a mandatory inclusionary zoning policy was in effect, they found that housing prices went up by 1% compared to neighboring jurisdictions without those policies.

In the 2019 report, author Emily Hamilton theorized that this was in part because to avoid triggering inclusionary zoning, developers tended to prioritize building single-family homes or smaller multifamily buildings. The smaller pool of eventual tenants or purchasers then need to take on more of the burden of the building cost.

“When developers talk about this, they often say that inclusionary zoning leads them to build fancier, higher-end, higher-cost projects than what they would otherwise build,” said Hamilton, a senior research fellow and director of Mercatus Center’s Urbanity Project, in an interview. “But it’s kind of unsatisfying to economists because, why wouldn’t you just build those fancier projects to begin with, regardless of the program, if you can make more money off of them?”

Another worry is that more stringent requirements could drive developers away from a particular jurisdiction, when they could more easily — and more profitably — build elsewhere.

McCarthy said this was most likely on a small scale, with developers looking across city lines where the market is largely the same, but the rules are different.

“In a place like Massachusetts, we have all these small jurisdictions. If any jurisdiction decides to get more aggressive, you do run the risk of driving development into other jurisdictions,” McCarthy said. “It does matter on small geographies.”

What’s really happening in Boston?

Because housing development, especially for multifamily projects, can take years, it’s hard to tell one year in how much of an impact Boston’s new inclusionary zoning policy has had on the rate of development.

McCarthy said the biggest difference in the rate of development would likely be in areas that already see less investment, where financial margins are thinner.

“Housing development is going to take place across the city in places that are already hot enough to warrant that kind of development,” he said. “Then the question is, in the marginal areas, is it going to make a difference? And the answer is it probably could.”

Between 2015 and 2024, 5,976 inclusionary housing units were approved by the city’s Planning Department and 3,286 were completed, according to data provided by the city. In the same decade, 39,078 total homes were permitted and 39,693 were completed.

Inclusionary units made up 8% of the total homes permitted in that time frame and 34% of the income-restricted homes permitted.

While housing development has undeniably slowed in the last few years, this trend has been seen across Massachusetts and the United States, and can be attributed to far more factors than only inclusionary zoning. The cost of construction has skyrocketed since the COVID-19 pandemic, and tariffs imposed by President Donald Trump’s administration have only heightened the cost of materials.

For development projects that have stalled in Boston, Dillon said many were approved under the old Inclusionary Development Policy, and other factors are holding things up.

“It’s interest rates, it’s the cost of construction … it’s equity markets just taking a larger pause or looking for much higher returns because of their fear of risk,” Dillon said. “There’s a lot of factors that are impacting Boston, but it’s also impacting most major cities.”

Avoiding unintended consequences

In some locations with inclusionary zoning policies, developers are provided incentives that reduce the costs of a project in order to balance out the losses from income-restricted units.

These incentives can include tax breaks, reductions in other responsibilities such as parking requirements or “density bonuses,” which allow builders to create more units than they would otherwise be allowed under the existing zoning.

Because many of these projects go through a design breakdown process, local officials can have the opportunity to negotiate higher levels of affordability in exchange for these incentives.

“The best bulwark against building the wrong stuff or making sure you get the right stuff is actually finding a way to get a much more sophisticated public sector negotiating at the table,” McCarthy said. “That’s easy to say and it’s harder to do, because you need to get people who really understand and are trained in the economics of property development.”

A movement has been growing across the country in favor of “funded inclusionary zoning” that provides financial incentives. Hamilton gave Baltimore’s program as a particularly effective example: Projects that fall under the policy receive a tax credit that covers the difference between the rents for market-rate and affordable units.

In Boston, the text of the inclusionary zoning policy makes no mention of incentives and leaves little wiggle room for negotiation. But Dillon said for good projects with community support, the city is willing to work with developers to find a way to make the numbers work.

“We’re not doing away with the policy. But we are looking at, sometimes, whether or not the obligation can be met by cash-out or off-site [units],” Dillon said. “We’re working developer by developer. But each situation is a bit different.”

Hamilton said rather than doing away with inclusionary zoning, a potentially more effective solution would be addressing other challenges, such as the city’s notoriously lengthy and convoluted planning process — something already in the works at City Hall.

“The city of Boston and the Boston region and New England generally have extremely exclusionary zoning. And there are massive things that could be done to make it easier to build housing for the people of Boston at more affordable prices,” Hamilton said. “The negative side of inclusionary zoning politics, sometimes, is that it can be a distraction from really solving the problem.”