Boston is the place to be – part 2

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From Michael Coyne
Senior Vice President
Jones Lang LaSalle

Recent sales of newer core assets have shown cap rates in the low 4.0% range as investors compete intensely for quality properties.  This represents close to a 100 basis point drop since the last peak in 2007. If a new, core asset in a prime suburban location came to market today, we would expect it to sell at a cap rate below 4.0% based on a trended year one proforma. This extremely low cap rate environment coupled with the strong demand outlook will result in record-setting pricing. 

Don’t be surprised to see prime suburban deals fetching well over $400,000 per unit during 2013.The last wave of multifamily development in eastern Massachusetts occurred primarily in the suburban ring along Route 128 as developers took advantage of Chapter 40B. Close to 22,000 units were built from 2004-2008, nearly 70% in the suburbs. This time is different, as only 20% of our current pipeline is Suburban. 

Due to the imbalance of institutional demand and available product for sale, investors have introduced a “build-to-core” strategy. They simply cannot buy enough core product, so they build it instead. This increased demand coupled with a lack of existing product for sale has sparked a new development wave that started downtown and is expanding into the suburban markets. 

This is a distinct shift from the last development wave, which was largely funded by shorter term, build-and-sell capital sources. These investors demanded higher returns and had a more difficult time withstanding short-term ups and downs in a very stable long-term market.

We have been closely tracking development trends, and divide the Greater Boston markets into three categories:
• Urban – including Downtown, Back Bay, North Station, Seaport, and Fenway
• Outer Urban – defined by drawing a ring connecting the ends of the MBTA’s subways lines (not the commuter rail) and including close-in towns like Cambridge, Somerville, Medford and Quincy
• Suburban – covering anything further out from the city, generally ending at the towns on and around Route 495

The last wave of multifamily development in eastern Massachusetts occurred primarily in the suburban ring along Route 128 as developers took advantage of Chapter 40B. Close to 22,000 units were built from 2004-2008, nearly 70% in the suburbs. This time is different, as only 20% of our current pipeline is Suburban. 

-Michael

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