Good news is hard to come by these days. But for some signs of life in an otherwise gloomy real estate sector, you don’t have to look much farther than the city of Boston. Although not immune by any means to global market cycles, the Greater Boston area continues to weather the economic crisis better than many markets due to its diversification of industries and an educated and highly skilled workforce. Boston and its surrounding suburbs are routinely ranked as one of the top regions in the country to visit, invest in, or simply call home. An excellent quality of life is created by a combination of an extremely diverse business sector, a concentration of top-notch universities and medical centers, and immediate access to manyavenues of recreation under the sun. So, not surprisingly, Boston’s residential market is outperforming other parts of the country.
When it comes to unemployment levels, Massachusetts and Boston continue to outperform the country as a whole. As of January 2009, unemployment in the Boston metro area was 7.2 percent and 7.4 percent at the state level, well below the national rate of 8.1 percent. Employment by industry sector in Boston is also markedly different from the rest of the United States, with the city reporting higher proportions in education, health, and business services.
In fact, Boston is often referred to as the commercial “hub” of New England because of this diversified economic base. Cycle-resistant industries such as medical research, biotechnology, and education continue to grow in the Boston metro area. The overall retrenchment of financial services firms in the city is still a factor as mutual funds lay off employees due to drastically reduced assets under management. However, Boston is not nearly as exposed as New York.
Also on Boston’s side is the fact that the area never experienced the explosion of single-family or condo development that plagued other parts of the country due to its natural barriers to entry and challenging entitlement process. While pricing and velocity have definitely fallen from their high-water marks, values are still holding relatively strong. The cost of living in Greater Boston is still well above that of most major markets. In fact, the average price for a Boston-area single-family home is $485,000, compared to a national average of $243,100.
Thanks to its economic underpinnings, the Boston multifamily market exhibits some of the strongest fundamentals in the nation. Particularly important is the prevalence of “prime renter” demographics (read: a young population) coupled with demand from academic institutions. Furthermore, the City of Boston estimates that one in three residents of Boston at any given time is 34 years old or younger, and demographic research firm Claritas reports that those aged 21 to 34 outnumber those aged 35 to 49 by 15 percent.
Given the area’s natural barriers to entry, high cost of housing, and a continually growing renter population, Boston has emerged as an ideal rental market for investors, both local and national. Still, the market is a costly one—Boston is currently ranked as the third most expensive metro rental market, only behind New York City and San Francisco. The average rent for a two-bedroom apartment in the Greater Boston area is $1,724 per month.
And those rents are higher in some submarkets. For example, in urban infill areas, there are several communities tracking higher net effective rents year-over-year. In fact, concessions for existing, established product are not nearly as prevalent as in some other markets. While rents are expected to decline slightly as the recession impacts performance, some industry experts expect the general economic effects to be tempered by the flexibility and relative affordability that renting provides. In Class A properties specifically, occupancy continues to hold strong and is currently calculated to be 94 percent—the majority of attrition is in one-bedroom units as people double up in two-bedroom units or move in with their parents.
As with other product types and across most markets, multifamily product in the Greater Boston area is not immune from a slight decrease in demand. However, while most forecasts expect occupancy in the Boston area to decline, a limited supply pipeline will ensure stability over the next few years. That doesn’t mean supply is currently constrained. Greater Boston saw a record number of multifamily unit deliveries and absorptions from 2005 to 2008. During that period, more than 12,500 new units were partially spawned by the Commonwealth’s affordable housing legislation (Chapter 40B, which allows developers to essentially bypass much of the approval process until 10 percent of a municipality’s housing stock is deemed to be affordable). 40B was primarily confined to suburban markets that had a very limited stock of affordable housing. Additionally, during the same time, the Boston area saw sizable delivery of Class A urban product, including Archstone Boston Common, Trilogy, 1330 Boylston Street, and Equity Residential’s new West End apartments. Even though these projects delivered a significant number of new units to the market en masse, the projects were well-received, quickly absorbed, and pushed net effective market rents to new highs in Boston.
New supply from 2009 to 2010 is estimated to slow dramatically to approximately 2,000 units. Due to the limited amount of condo development in the area relative to other places in the country, the multifamily market is not experiencing a significant drag on rents and occupancy as a result of a large shadow rental market. A small group of condo projects, including the 224-unit Harborview and 146-unit Mezzo, have been converted to rental properties without difficulty.
Signs of Life
Tighter credit markets and weakening fundamentals resulted in more measured activity last year, slowing transaction velocity considerably. Although down from the frenetic pace of previous years, ’08 was still an active year for large-scale deals. Archstone Smith sold 2000 Commonwealth Avenue, Archstone Waltham, and Reading Commons. Other trades included INVESCO’s acquisition of The Heritage at Bedford and Guardian Life’s acquisition of Avalon Ledges in Weymouth.
Investment trends in the Boston apartment market will likely diverge in the near term. Demand for high-quality, stable assets inside the city’s major commuting loop, Route 128, will remain strong with continued institutional interest. Within the multifamily space, investors are still willing to pay a premium for stabilized properties in premier submarkets such as Boston Proper, Brookline, Somerville, and Cambridge. However, communities located further from Boston with more exposure to corporate downsizing will likely face more difficulty in maintaining occupancy.
While average cap rates have risen between 150 and 250 basis points from their historic lows, multifamily product is currently experiencing more liquidity and better pricing than other asset classes in the city.
In general terms, the Greater Boston apartment market is standing strong and continues to perform well despite a less than ideal economic climate. Even though single-family home prices are trending downward, many well-educated, skilled employees of the Bay State are still priced out of homeownership or cannot qualify for a conventional mortgage. Again, this is a prime renter category.
For the balance of 2009 and into 2010, landlords are going to be vigilant in terms of delinquent renters and will proactively work with those who have lost their primary source of income. Owners who have an attractive basis are going to be analyzing their strategy for each multifamily asset, whether now is the right time to refinance, sell, or hold for the long term. For those investors who have been priced out of the market over the past several years, there will be increased buying opportunities as cap rates continue to rise from their historic lows and selective distressed assets are brought to the market. And that’s good news, indeed.
POPULATION: 4.5 million
Median Age: 31
Median Household Income: $64,144
Average Rent: $1,634
Notable: With 20 million visitors annually, Boston’s Faneuil Hall Marketplace was ranked the fourth most-visited tourist site in the country, even topping Disney World, which came in fifth.