Last night I attended the last public meeting for the initial phase of HYM Group’s huge Suffolk Downs development. For the past two years HYM has hosted these public affairs, at every sort of East Boston and RevereĀ  neighborhood association and to other sorts of locally resident communities. I’ve seen it so often that I’ve practically memorized the presentation. It is worth remembering, because it involves 10,000 units of housing — 2200 of them for sale — as well as 50,000 square feet of commercial space, 40 acres of open space, and an estimated cost of $ 320,000,000 just to build the necessary infrastructure, not to overlook $ 23,000,000 in so-called “mitigation payments” — in reality a kickback — to the City of Boston and probably an equivalent kickback, er “mitigation,” to the City of Revere.

In effect, HYM proposes to build an entire City, occupying — so its CEO, Tom O’Brien, tells us — 20 years to complete it.

I have no problem with the presentation. HYM has gone the extra mile, maybe an extra ten miles, to involve everyone it could reach out to, assuring that the public is fully aware of its plans and all the details, which are long and manifold. I also have no problem with the proposal. If HYM’s investors want to take the risk involved, that’s what capitalism is, and kudos to its capitalists for accepting risk when they could just as easily own Treasury bonds.

My two problems, which I will now discuss, are with the nature of the capital risk and the strong likelihood that HYM’s 10,000 units of housing will peak the market, moving maybe the entire northern half of metro Boston toward oversupply, with all the consequences. Don’t call me alarmist. I’ve seen many real estate projects — huge ones — top off a market easy to topple, given the immense degree of borrowed-money leverage that real estate markets always take on. We think today that there’s no stopping the Boston building boom, that people in need of housing will continue to clamor to live in Boston; but these trends can change, and quickly. In 2004 there seemed no end to the rush for suburban McMansions, yet by 2008 these over-sized houses far from Downtown were almost unsaleable. Who of today’s home buying generation wants one ? not many.

Those who live in Boston — and who are not homeless — already live in a housing unit. New housing is Boston needed only for those who do not yet live here. So : will 10,00 new residents be available for HYM’s 10,000 units ? Or, if current residents decide to live in the HYM’s city, will those 10,000 current units find 10,000 people to rent or buy them ?

That is the risk that HYM’s investors are taking on, and I am not convinced that it’s a slam-dunk. The enormous costs of building housing in Boston already motivate builders to seek outlying locations. Why else is the Governor’s zoning reform bill so powerfully backed by Mayors and realtors ? HYM has it even worse : it can’t only build. It has to implant the entire infrastructure that on existing streets is already in place : electric lines, sewers, water mains, cable, and roads. O’Brien told last night’s meeting that the total cost of building a Suffolk Downs unit is $ 500,000. I think he’s under-estimating. That might be the cost now, but he is committed to use union labor — which is a good thing — and union wages rise over time, as do the costs of materials and permits. Remember : the HYM proposal will be built in four phases over TWENTY years.

The other problem is that Tom O’Brien asserted that his investors have accepted a 5.7 percent rate of return (ROE). If he is correct — and I’m not convinced — then his investors are taking way too great a risk of market change. Most REIT’s look for ROE’s of 11 to 15 percent. Given the immense degree of leverage — borrowed money — involved in major real estate projects, if sales fall short by ten percent, or if mortgage borrowers’ default rate is higher than the usual two to three percent, an ROE of 5.7 runs a substantial risk of default or loss. HYM’s record of success with big projects may well have induced its investors to accept a 5.7 ROE; but reputation is not immune from market change. A 5.7 ROE by itself suggests that our market is peaking, because no serious investor would accept less, and very few would accept 5.7. If this is the present price level, it is one that likely can’t be sustained without major boosts in our region’s median family income.

Speaking of median income, some activists showed up at last night’s meeting asking, or demanding, that HYM offer more “affordable” units than the 13 percent required by City development rules. Personally, I don’t see why there should be any such rule. It’s the investors’ money. They are risking it, they should be free to set the rules. The 13 percent requirement has squeezed developers already. Anything more than that would likely stop development altogether. I think the entire notion of “affordable” in our housing market has gone for the duration and won’t return unless family income rises significantly — a subject of itself , well worth discussion — or the market turns seriously down — in which case we’ll have, as a City, worse economic problems than affordability. In any case, the affordability demand with respect to HYM seems to get the market wrong. I think you will see HYM doing some serious price cutting well before its 20 year build period ends.

— Mike Freedberg / Here and Sphere