Boston, home to the Super Bowl and–finally!–World Series champions, is on the road to economic recovery, which means good news for its multifamily market. Business demand and production growth are benefiting local employment, with job growth expected to have increased by 2 percent by the end of the year. Roughly one-third of the 62,000 new jobs will be well-paid positions in the professional and business services sector. And, the unemployment rate is expected to ease, to 5.2 percent.
A sure sign that the economy is recovering is the growing wave of venture capital dollars flowing into the Boston area, which is helping to expand the local biotech industry. The high-paying jobs entering the market are bolstering housing demand, but with the median housing price now well above $400,000, fewer people can afford to buy a home.
Boston ranks as one of New England's top multifamily markets.
NEW DIGS: The 420-unit, 28-story Archstone Boston Common, below, is the city's first rental, residential high-rise to be built in 20 years. Archstone-Smith expects to deliver first units in mid-2006.
Photo Credit: Andrew Gunners/Getty Images
Boston's economic improvement in 2005, along with its declining housing affordability, will boost demand for apartments. In the first half of the year, net apartment absorption improved, especially at luxury complexes. Marketwide vacancy, however, was projected to increase by 20 basis points in 2005 to 5.4 percent. Cambridge, home to Harvard and MIT, will remain a top-performing submarket this year, with vacancy dipping below 3 percent. Brighton/ Brookline and Boston City are also displaying significant improvement, with vacancy in both submarkets declining by more than 100 basis points over the last year.
Driven by solid gains in the Class A apartment sector, asking rents in the Boston market are expected to increase by 3 percent during 2005 to an average of $1,607 per month. In Cambridge, the most expensive submarket in terms of rent, growing demand for the area's upscale environment allowed owners to reap an average increase of 6 percent in gross revenue per unit in 2004. Effective rents marketwide are forecast to reach $1,506 per month in 2005, a 2.7 percent increase over 2004.
The good news is prompting developers to bring more product online. Apartment development is on the rise, with 3,300 units slated to finish construction in 2005. But many developers have been switching projects from apartments to condominiums prior to completion, which could reduce the final tally of new rental units. This trend, along with a growing demand from would-be renters, is likely to offset any gains in apartment inventory. Still, the apartment construction pipeline is full, with another 6,000 units expected to be delivered through 2007. This could challenge the region's vacancy rate if the economy slows.
Yankee Thrift?
Much of the new construction is in the luxury apartment sector. Archstone-Smith Trust is building a luxury apartment complex in East Cambridge that will be surrounded by condo development. The first phase of the 767-apartment project is scheduled to hit the market in the third quarter of 2007. The company almost started the project in 2004, but construction costs–specifically the escalating price of steel for the steel-framed project–increased the price of the $185 million project by 25 percent. Twelve percent of the units have been set aside as affordable housing, and the average rent for the remaining units will be $2,500 a month. Archstone is also building the $150 million Archstone Boston Common apartments located on Washington and Essex streets in Boston's Chinatown neighborhood. The 28-story building will have 420 units, 46 of which will be affordable housing. The project is expected to open in 2006.
TOP OF THE TOWN: Demand has been high for the luxury condos at The Residences at the Ritz-Carlton.
The condo conversion movement also is especially notable in the luxury sector and its connection to posh hotels. The Boston Redevelopment Authority this year granted approval to four new hotel/residential ventures, with others on the drawing board. The Ritz-Carlton Towers on Avery Street in downtown Boston offers 309 condominiums along with 193 hotel rooms. Condo residents are offered the same services that hotel guests receive, including valet parking, concierge amenities, and spa services. Demand for the condo units has been so great that the developer, Millennium Partners-Boston, will sell an additional 63 rental apartments, which now are part of the Phillips Club, as condominiums to take advantage of the hot condo market.
The Mandarin Oriental Boston, now under construction adjacent to the Prudential Center in Back Bay, is among the most prominent of the luxury projects. The $200 million Mandarin, with a planned mix of 168 hotel rooms, 40 condominiums, and 48 rental apartments, already has garnered support and pre-sales from a number of Boston celebrities.
HIGH LIFE: The Mandarin Oriental Boston will be a mixed-use development with a luxury hotel, apartments, and condos, in addition to high-end retail. Slated to open in 2007, the project is expected to revitalize Boston's upper Boylston St. neighborhood.
These luxury condo projects are having a ripple effect in the broader condominium market. The median price for a condo in Boston is now above $330,000, and unit sales are up 42.5 percent since 2000. Coupled with the steep rise in single-family housing, the rise in condo prices looks to be good news for apartment market owners and investors.
Patriot Games
Improving fundamentals and the condo conversion trend prompted more apartment sellers to join in the deal-making game during the past year. The sale of Towers at North Point to a condo converter for $334,000 per unit set the pace for investments in 2004. Although numerous buyers were active in the market during 2004, the median price declined slightly. Despite a few high-end purchases in Cambridge by the likes of Equity Residential and Crescent Heights Investors, the median price fell due to the predominance of sales in the lower end of the market.
Looking forward, the number of institutional-grade apartment properties sold will have increased by the end of this year as operations in the Class A segment continue to improve. The outlying suburban areas are the best bet for opportunistic investors, as vacancy is still relatively high and rents are just starting to stabilize. The median sales price for the metro area is expected to reach $120,833 per unit, an 8 percent increase over last year. Cap rates for properties of 40 or more units typically range from 5 percent to 9 percent. The median rate was 6.7 percent last year, with Class A properties trading at 6.2 percent or lower.
Although Boston has a strong apartment construction pipeline and is in the early stages of economic recovery, the market remains above average when compared to other metros for apartment owners and investors. Boston's low housing affordability and relatively low vacancy bode well for its investment future.
Steve Witten is senior director of Marcus & Millichap's national multi housing group in New Haven, Conn.
Soaring Stocks
NAHB's apartment index sees another strong performance.
Proving the power of the multifamily industry, the Multifamily Stock Index (MFSI) has been beating the S&P 500 by more than 130 percent, according to Elliot Eisenberg, a housing policy economist at NAHB who created the MFSI. The index hit its second-highest level ever in September.
"The S&P 500, with stocks reinvested, is up about 11 percent [in the past six years], whereas the MFSI is up 155 percent," says Eisenberg, who began tracking the MFSI in December 1998. After a small dip in August, the stocks bounced back strongly in September, rising by 48 points to 2,554–a 26 percent jump from September 2004.
All of the stocks included in the MFSI have to earn at least 50 percent of their income from rental transactions, and most earn substantially more than that. Of the 27 publicly traded companies currently included in the MFSI, 24 or 25 are REITs, Eisenberg says.
"This index doesn't capture all rental companies–some aren't public–but it does include a lot, and it is a good measure of health," Eisenberg notes.
Though MFSI stocks were on par with the S&P 500 (with stocks reinvested) at its inception in 1998, the multifamily stocks have taken off since then and never looked back. "The S&Ps have had a very good run, and my returns [on the MFSI] have consistently done better," Eisenberg says.
The question is, how long will this outpacing trend continue? Even Eisenberg can't say for sure.
"It would surprise me if it continued to outperform by so much, but the fundamentals are still in place for a very good ride," he says. "Vacancy rates will continue to go down, rental rates will improve. And as the economy improves, interest rates will rise, so people who might want to buy won't be able to and will continue to rent." –Kate Herman
Busy Builders
The condo craze pushes permits and starts upward.
Just a glance at Marcus & Millichap's supply index for the second quarter is all it takes to see a steady upturn in multifamily building permits, with starts lagging predictably. The second quarter's index registered 109.48, building on three prior quarters of increasing construction activity. (The index tracks the number of multifamily permits–apartments, townhouses, and condos–against multifamily starts, as measured by the Census Bureau, Economy.com, and others.)
"Multifamily permits are up, but those are heavily skewed toward condos. They're so hot right now," explains James Holt, national client services manager for Marcus & Millichap.
Yet the upswing in permits and starts is being spurred by factors others than condo mania. "We are building at least two projects for August 2006 delivery," says Joe Coyle, president of GMH Communities Trust's student housing division, College Park Communities. The group broke ground in August for the Orchard Trails Apartments, a 144-unit student housing community near the University of Maine at Orono.
In September, GMH also began construction on another development of the same size: The Enclave II, near Ohio's Bowling Green State University.
–Amy Rogers Nazarov