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'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.
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.
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.
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.