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
Worcester's rental market is catering to a high-income tenant, which could be bad news for local workers.
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.
Factors Contributing to Rising Rents
Here is a short list of factors that have caused overall rents to go up everywhere, and Worcester in particular:
Low interest rates: In 2019, average interest rates for 30-year mortgages were just under 4%. In 2020, they were around 3.25%, and in 2021, rates ranged between 2.75% and 3% for almost the entire year. This allows buyers to purchase more house for the same amount of money, leading to a creep in housing prices.
Increase in HUD Fair Market rents: These are used to calculate what Section 8 will pay for an apartment. The following table shows the changes over the years:
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 $1,843/month, which is a 39% increase in rents in 6 years. The significant rental increase that happened from 2019-2020 of 16.1% coincided with the beginning of the increase in prices of multifamily homes. Once again, when Section 8 raises rents, everyone else follows.
The Dual Tax Rate in Worcester
The city charges different rates for Commercial and Residential properties, putting an unfair burden on homeowners. The 2022 tax rates are:
Residential: $15.21 per $1,000
Commercial and Industrial: $33.34 per $1,000
This creates 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. Instead, they have an incentive to move to other communities with lower tax rates. This has led to a significant drain on the commercial tax base in Worcester. Currently, 77% of the value of all properties in Worcester are residential, yet they only pay 59% of the taxes. If this trend continues, we will see more commercial entities leaving Worcester, leaving residents to shoulder the tax burden.
Here is a link to an audio clip where I discuss some of the aspects of this problem: Listen here.
When commercial taxes are high, investment money flows into residential multifamily housing, raising the prices of these buildings and subsequently increasing rents. If commercial taxes were more equitable, more money would flow to commercial real estate, increasing the commercial tax base and allowing taxes on residential properties to decrease.
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:
Drafty old windows that shook and let the wind in
Chipped and peeling lead paint everywhere
No off-street parking
A clawfoot tub with a weak showerhead and three curtains that closed in on me when I showered
A steam heating system that was unreliable at best
$450/month for 3 BR
I was happy to have a cheap place and went to work every day. Now, with Covid, tenants spend lots of time in their apartments and post photos on social media about how nice their places are. If landlords don't provide this, they will not attract tenants.
Who is to Blame for Rising Rents?
Sadly, I think the answer is our Government, elected officials, and college admissions officers.
The Federal Reserve (FED) controls interest rates, which affect mortgage rates and consequently housing prices.
HUD sets the market rates for apartments, influencing overall apartment prices and landlord expectations.
The Worcester City Council sets the tax rates for residential and commercial/industrial properties, with the opportunity to make them more equitable.
This year, the council (led 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.
The College Arms Race
Colleges need to differentiate themselves, often by improving athletic facilities and dorms. It becomes challenging to go from a beautiful dorm apartment to one with the amenities 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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