Weatherizing Worcester 3 Deckers
Here is an article from Mass Live written by Trea Lavery.
This is an interesting concept: weatherizing and electrifying old buildings to bring them from the 19th and 20th centuries into the 21st century and provide better housing.
For someone who has seen more of these than most people (I have seen 2,441 investment properties in and around Worcester since I started counting in 2018), I agree that these buildings need a lot of work. It is a great sentiment to improve these buildings, and definitely good for the people who live in the buildings that are improved.
The Parable of the Starfish
It is sort of like the Parable of the Starfish:
One day, the old man was walking along a beach that was littered with thousands of starfish that had been washed ashore by the high tide. As he walked, he came upon a young boy who was eagerly throwing the starfish back into the ocean, one by one.
Puzzled, the man looked at the boy and asked what he was doing. The young boy paused, looked up, and replied, "Throwing starfish into the ocean. The tide has washed them up onto the beach, and they can't return to the sea by themselves. When the sun gets high, they will die unless I throw them back into the water."
The old man replied, "But there must be tens of thousands of starfish on this beach. I'm afraid you won't really be able to make much of a difference."
The boy bent down, picked up yet another starfish, and threw it as far as he could into the ocean. Then he turned, smiled, and said, "It made a difference to that one!"
On a small scale, and in buildings owned by non-profits or with deed restrictions on rents due to the money spent, this is a great idea. It will improve the housing stock and make Worcester a better city.
Unintended Consequences
The problem is the unintended consequences. As the article states, there may be 5,000 three-deckers in the city. We are currently seeing a surge of new construction multifamily buildings going up. These will be nice buildings compared to the existing housing stock and will typically cater to those on the top end of the income spectrum. We are seeing 1-bedroom rents at close to $2,000 per month.
Is the goal to have all of the housing be of that caliber? If so, who is going to pay for all that work? If a three-decker is in good shape, we can spend about $50,000 to $100,000 making it better. If it is in bad shape, it could be close to $300,000. Let's say we do 100 buildings at an average of $150,000 each; that totals $15 million. Talk about starfish.
Market Impact
Now for the unintended consequences:
Let's say rent for a 3-bedroom unit is set at $2,000 per month, a typical Section 8 rent. It is great that there would be 300 new apartments at that price, but most apartments on the market will still not be redone. All the 3-bedroom rents will be at $2,000 per month, as Section 8 doesn't really take into account if a house is simply "better." This serves to bring up rents throughout the city. Most renters are probably living in much worse conditions. It is hard to believe that private building owners will make these improvements if they can still get $2,000 per month without making the improvements.
Then we have taxes. If a building is making $6,000 per month in rent, it is worth at least $600,000. If the city taxes these at 100% value times a 17.87% tax rate, you are looking at $10,722 a year in taxes. This will make it hard for the building owners to make money.
When you shop for multis in Worcester, you will see there is a big range in the assessed value of these buildings. There are two big factors that serve to bring up the assessed value and, in turn, the taxes:
Someone pulled a building permit to do work (this has caused more unintended consequences with people simply not pulling permits).
A recent sale at a high valuation (this causes the "new owners" to have to raise rents to cover the taxes, along with the debt service on their loans, now at over 7% for someone who buys today).
Conclusion
So why don't we force everyone to improve their buildings? There are people who are willing to live in less than perfect buildings in exchange for a lower rent. I have lived in some dumps in the city, and there was a tradeoff. The unintended consequence here is that if we get rid of the dumps, people simply get priced out of the city.
Clearly, this is not a full analysis of what is going on here, but hopefully, it gets the conversation started.
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