Boston is an anomaly. Most mature cities with centrally-located, high-density residential neighborhoods—think New York, Washington, D.C., Los Angeles, Chicago—see mid-rise and high-rise properties proliferate. Not Beantown. Multifamily residential offerings have historically been quite limited in the city, even more so in its urban center.

Why? One key reason is the historic nature of many of the city’s neighborhoods, which makes modern high-rise product difficult to permit and develop. Aside from the South Boston Waterfront, new development has only been prominent in the West End, which was master-planned and developed from the 1960s to the present.

Despite these hurdles, downtown Boston offers a vibrant lifestyle, which has created a residential market appealing to young professionals seeking close proximity to employment as well as “empty nester” Baby Boomers relocating from the suburbs and desiring access to urban amenities. While there has been over-building of condominium product, which has been weighed down by sluggish sales since 2007, performance in rental properties has remained relatively steady and strong multifamily demand has emerged in 2010. And that bodes well for the future of the city.

Unabashed Demand

Known for the high number of universities in the greater metro—78 institutes of higher education—Boston boasts an ideal renter demographic. There are a large proportion of students, graduate students, and recent graduates in the region. This 18- to 34-year-old demographic makes up approximately 15.3 percent of Boston’s population and offers a steady stream of residents. Coupled with the city’s inherent limitations on supply, this has kept apartment fundamentals in Boston remarkably consistent.

According to Reis, a national real estate research firm based in New York, “despite rising unemployment, falling incomes, and competition from rented condominiums and foreclosed homes, investment-grade apartment demand has been solid during the recession” in greater Boston.

Credit: Edua Wilde Photography

Absorption in the metro area was 2,300 units in 2009, slightly lower than in the past three years, but well above the historical average from 1988 to 2004. As absorption levels rose, increased development over the past few years pushed vacancy levels from just below 5 percent in 2005 to 6.5 percent in the first quarter of 2010. Supply in the city center has generally outperformed the greater Boston market.

Development within the multifamily sector has stalled significantly in the past few years due to a severe lack of financing capital, limiting new supply to the market. Only 91 units are expected to be delivered in 2011. Renters will face higher rents in 2011 and 2012 as they compete for the dearth of Class A offerings. In fact, Class A asking rents are currently $3,188 per month, more than twice the metro average.

As in much of the rest of the country, investors are showing increased interest in Boston’s multifamily sector and competing to buy stable, well-located assets. Cap rates are falling, and sales prices will continue to rise. According to New York-based Real Capital Analytics, Beantown has achieved a Top 6 ranking in year-to-date investment sales for all property types. Through 2009 and 2010, Boston property sales were approximately $3.5 billion, falling behind Los Angeles, Manhattan, and Chicago, among major U.S. cities.