From Travis D’Amato & Michael Coyne
Managing Directors, Multifamily Capital Markets
Boston continues to benefit from an unprecedented demographic wave and the strongest multifamily fundamentals we have seen in over a decade. With just under 5,000 units a year on average scheduled to deliver in Metro Boston through 2019 and over 8,200 households being created annually over that same time period, we are still not building enough units to meet this wave of demand.
Boston is still the place to be
The Boston multifamily market remains ones of the best performing markets in the country. As a result, institutional investors view Boston as one of the top three most desirable markets, alongside New York and San Francisco. Our diversified economy continues to grow and attract young talent, with the city boasting the highest percentage of young professionals in the country.
Solid economic fundamentals drive a positive outlook
Relative to most other cities, Boston’s employment remained insulated through the downturn thanks in large part to a heavy concentration of jobs in healthcare, high-tech and life sciences. These sectors weathered the recession fairly well and have surpassed financial and legal services as the primary drivers of growth in our local economy. In fact, by September 2012, Boston had regained all of the 103,000 jobs lost during the recession. This economic resilience, combined with a lack of new multifamily deliveries from 2009-2012, caused metro-wide rents to grow by almost 23% from the last peak. Some especially strong urban submarkets have experienced growth of over 40%.
Development shifts to the suburbs
As construction costs continue to rise and urban rent growth flattens, developers and equity have begun to focus on outer-urban and suburban development opportunities. Wood-frame, non-union developments can be delivered at less than half the cost of urban, high-rise, 100% union projects. The suburbs have seen limited development activity over the last four years, which has driven significant rent growth in existing properties. Recently, this rent growth has produced rents that support untrended return on costs north of 6% as far out as the I-495 corridor. Costs are more predictable and developers are not pushing overly aggressive rent assumptions.
The effect of urban deliveries
Urban areas have been the overwhelming focus of developers over the last three years. New luxury apartments continue to deliver across the city at an historic pace. Approximately 5,300 units of urban, institutional quality rental housing were delivered from 2013-2016, with another 2,500 units being delivered in 2017.
There has been a transformation of Downtown Boston’s rental housing, which is supported by exceptional demographics and the well-documented trend of urbanization. However, we still have the lowest percentage of Class A housing across any major Metro in the US.
Though we are confident these units will be absorbed by increasing demand, certain neighborhoods will see a rise in short-term vacancy and flat rent growth and concessions will continue as towers deliver 200 to 400 vacant units at a time.
Overall, Boston is still not being overbuilt. Demographics are still in our favor like never before, and the composition of the development pipeline is shifting to adapt to new rent and cost assumptions. Not enough quality multifamily product exists to meet the pent-up demand of renters or investors in the Boston Metro, and capital allocations are driving more and more institutional equity into the top few real estate markets. Our unrivaled educational institutions will continue to attract the top intellectual capital in the world, but now we will finally have the modern housing and 24-hour lifestyle necessary to retain our graduates for the long run. We feel strongly that Metro Boston multifamily will continue to thrive.