THE GREATER Boston area—home to 4.6 million people—boasts 86 colleges and universities and a strong, diverse economic base rooted in education, medical research, technology, and financial services. In fact, Boston currently has one of the lowest unemployment rates in the country, at 5.8 percent.

Natural and regulatory barriers to entry, combined with the high cost of homeownership, have produced healthy rent growth and a stabilized occupancy level in excess of 95 percent.

The slow pace of new supply coming on line has also bolstered the market. Just 27,631 units were added in the past decade, according to New York– based market research firm Reis. And demand has certainly outpaced supply.

One in three city residents is under the age of 35, the prime age group for driving rental demand. With that kind of a dynamic, it's no surprise that the top-tier rental product is setting new benchmarks for market rents.

Through the first quarter of 2012, greater Boston apartment fundamentals showed gains across the board, with effective rents averaging $1,696 per month, according to Reis. And from 2012 to 2016, greater Boston will see cumulative rent growth of 27 percent, an average of 5.7 percent per year, forecasts Boston-based market research firm Property and Portfolio Research. Moreover, the vacancy rate fell 20 basis points (bps) in the first quarter this year, down to 3.8 percent, and Reis predicts that figure will fall to 3.3 percent by year's end.

Breaking Ground

Apartment supply in the metro has historically been constrained by a lack of land, high construction costs, and a challenging permitting and political environment. Even with the delivery of 4,805 Class A units since 2009, net absorption has totaled 6,745 units, driving rents and virtually eliminating concessions.

Given the healthy pace of rent growth and an ultra-competitive investment sale market, the time is right for new construction. In Boston, institutional-quality apartment communities trade infrequently at best, and new development is one of the higher-yielding ways for pension funds, advisers, and operators to add new product to their portfolios.

Greater Boston is expected to see the delivery of 12,500 units between now and 2016. Most of that new construction is concentrated in downtown Boston and Cambridge.

The Seaport District will be the heart of Boston's major infill development in the foreseeable future, adding approximately 2,000 units. Meanwhile, the Fenway/LMA boasts more than 50,000 employees and 15,000 students within a 213-acre area. This area has seen a tremendous transformation over the past decade. With new construction beginning this year on Boylston West (a mixed-use development) and 1282 Boylston Street, the submarket should continue to see an influx of residents.


Much of the development in the area is being fueled by a very liquid capital market. For the right project, sponsorship, and location, life companies are again offering construction-toperm loans, and banks are once again offering nonrecourse construction loans.

With spreads as low as 225 bps over LIBOR for new construction, developers are still able to hit their pro formas by offsetting high construction costs with low interest rates. The market for permanent financing is also extremely attractive, with low-leverage, short-term interest rates around 3 percent and longer-term rates around 4 percent. Besides being able to underwrite new development, these interest rates continue to allow investors to transact on the sales side with cap rates in the 4.5 percent to 5 percent range.

Benjamin Sayles and Lauren O'Neil are directors in the Boston offi ce of HFF. O'Neil handles debt and equity transactions, while Sayles addresses investment sales transactions.