Boston Remains Tough

Boston—After a year of lawsuits, HarborView at the Navy Yard, a failed condominium development, has completed its transformation into a rental property.

Prudential Financial, Inc., the former equity investor in HarborView, foreclosed on the property this summer from the original developer, Trammell Crow Residential. The Newark, N.J.-based owners hope Boston's strong rents will turn around the 224-unit complex, located on the waterfront near the meeting of the Mystic and the Charles rivers. As of early August, manager Roseland Property Co. expected to offer rents starting at $1,965 a month for a 560- square-foot studio and rising to $6,300 for a 2,252-square-foot penthouse. The rents average just more than $3 per square foot.

Rents are rising quickly in Boston despite a wave of new rental apartments and new condominiums that peaked in 2006. The units came online faster than new tenants could fill them, pushing the percentage of vacant apartments up. However, Boston's rising incomes and the quality of the new housing are helping landlords raise rents.

“Rental is performing now as well as it has since 2001,” said Simon J. Butler, executive director for Cushman & Wakefield, Inc. The average asking rent in the Boston area is projected to rise 4.2 percent this year. That's the largest annual increase since 2001, when rents increased 4.6 percent, according to Reis, Inc., a market research firm based in New York City.

Tenants are paying more to rent apartments in part because they have more to spend. Average household incomes in Boston rose more than 5 percent a year for four years in a row from 2004 to 2007, according to an analysis of U.S. Census data by Reis. Even this year, with the economy teetering on the edge of recession, area incomes will rise another 2 percent. Rents are also rising because the new units can earn higher prices than the existing aging inventory, drawing in wealthy renters, according to local experts.

At the same time, the vacancy rate is expected to reach 6.3 percent by the end of the year, up from 5.7 percent last year and 5.5 percent in 2006, according to Reis. New construction is one culprit in pushing vacancies up. Developers will finish 3,283 new apartments in 2008, a 1.7 percent increase. Builders finished even more apartments over the last few years: 4,253 in 2007 and 4,963 in 2006, according to Reis.

Those are all huge numbers for Boston, where developers only added about 600 apartments a year for the entire decade of the 1990s. The short-age of new apartments pushed Boston's percentage of vacant apartments below 1 percent in 2000.

This is a town famous for developments that take seven years to get their zoning approved. “The process to get things approved remains the toughest in the country,” said Paul Donahue, a senior vice president in the Boston office of CB Richard Ellis.

However, local officials, led by Mayor Thomas M. Menino, promised at the turn of the millennium to increase the production of housing here, and they have more than kept their word.

Boston's apartment market will absorb 2,010 apartments this year, more than 1,000 shy of new production. Absorption is driven in part by new jobs. Boston's employment base grew between 0.33 percent and 1.18 percent from 2003 to 2007 and will shrink this year by 0.4 percent, according to Reis.

Production should drop over the next four years. Developers will only open 2,835 apartments in 2009, and openings will fall below 2,000 units a year in 2011 and 2012, according to Reis. Recession worries and the credit crunch are slowing some developers down.

Many suburban villages have also lost a major motive to allow developers to build new apartments. Towns in which at least 10 percent of their housing stock is not affordable to lowerincome families can be forced to accept new mixed-income development under Chapter 40B, the state's comprehensive zoning statute. Many towns now meet the standard and can go back to refusing new development.

With fewer apartments joining the inventory and a recovery in the job market, the vacancy rate will begin to drop starting in 2010, creeping down to reach 5.5 percent by 2012, according to Reis.

Prices for apartment buildings have held steady in the Boston area. Capitalization rates averaged 5.9 percent over the 12 months that ended in the second quarter, according to Real Capital Analytics (RCA). That's about where they were last year, after rising more than 200 basis points over the winter. Cap rates represent the income from a property as a percentage of the sales price. Prices average $170,000 per apartment.

Buyers express a strong preference for properties in strong urban submarkets. “We are seeing a slowdown in the suburban areas,” said Richard Robinson, principal with Apartment Realty Advisors Boston.

However, buyers are still interested in suburban properties, provided they are near major employment centers. UBS, a pension fund adviser, paid $36 million, or $173,913 per unit, for the 207 apartments at Archstone-Smith's Archstone Waltham, located in Waltham, Mass., near biotech and medical job centers off Interstate 95. The price works out to a cap rate of about 5.75 percent. The apartments rent at prices starting at $1,370 a month for a one-bedroom unit.

The Waltham deal shows how real estate investment trusts (REITs) are selling and pension funds are buying Boston apartment buildings. REITs accounted for more than half of the sellers over the last 12 months in Boston, according to RCA, while institutions like UBS accounted for slightly more than half of the buyers.

UBS plans to spend $6,000 per unit to bring more income to the property, raising the cap rate to 6.5 percent, said Robinson. That demonstrates, once again, the ability of area landlords to push rents higher.

“Again another name change,” commented one skeptical resident of the Waltham property at Apartment Ratings.com. “Rent goes up and up, and you get nothing.”

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