Boston—For apartment owners and developers, this city is going through a golden period. Rents are expected to rise and vacancies are declining even as apartment construction soars, experts said.
Despite the pain of getting a permit here, the necessity of applying for a zoning variance almost any time a developer wants to build new multifamily housing, and the near impossibility of finding suburban sites to build on, more new apartments are now opening their doors in the Boston area than at any time since World War II.
Developers will finish 6,301 new market-rate rental apartments this year across the five counties of the Boston metro area, an increase of 2,000 from 2004, according to Northeast Apartment Advisors, Inc., a local research firm.
And even more apartments may be coming: 11,104 new rental units at 68 projects have received building permits from local officials. The number of new apartments completed each year should keep growing through 2008, according to Northeast Apartment Advisors.
One of those new projects, a 28-story high-rise projected for completion next year, is the biggest new apartment tower to come to Boston in 20 years, according to the developer. Archstone-Smith, a real estate investment trust (REIT) based in Englewood, Colo., worked for years to win the right to build the 420 mostly luxury rentals at Archstone Boston Common, first submitting its request for a building permit in December 2001.
Fortunately, Boston has a huge pent-up demand for new apartments because of “40 to 50 years of underproduction,” said Tom Meagher, Northeast Apartment Advisors’ president. Rent control and crime or worries about crime have kept developers away from the city for much of that time, he said.
Now that the Massachusetts economy is recovering from the loss of 206,000 jobs during the dot-com downturn, thousands of new tenants are moving into rental apartments, boosting absorption and helping keep rents strong even as the wave of new supply comes on the market. The state gained 51,000 jobs last year and another 23,000 in the first five months of this year.
Improved job growth helped push absorption of empty apartments last year to the highest level since 2000, according to figures from Reis, Inc., a research company based in Manhattan, and the market is on pace to match that level 2006.
Meanwhile, vacancies are declining and experts expect the demand for apartments to keep climbing, pushing rents higher for at least as long as the national economy stays strong.
In the second quarter, rents grew nearly as much as they did over the entire 12 months of 2005, swelling by 1.5 percent compared to 1.7 percent last year.
Of course, these increases are nothing compared to the rent hikes of 2000, when 40 years of almost no new construction, the end of rent control, and the inflated economy of the tech boom combined to push rents up 14 percent. But it’s still respectable growth.
The healthy trend should continue as the local economy continues to firm up and the pace of new construction slows a little after 2008, mainly because it is still much easier to build office towers in Boston than apartments and the market for office space is recovering, said Meagher.
Condominium conversion projects have also helped keep the market tight by taking a massive number of rental apartments out of the competition for tenants. Between the start of 2005 and May 2006, 35 apartment developments totaling 4,223 units converted or announced their plans to convert to condominiums, offsetting roughly two-thirds of the new apartments that opened over the same period, according to Northeast Apartment Advisors.
But now that demand for their products is waning, condominium converters are less eager to buy apartment properties. That has sent prices down and pushed up capitalization rates, which represent the net operating income of a property as a percentage of the sales price. The city notched just $130 million in apartment sales in the second quarter, down from $620 million in the fourth quarter of 2005, according to Real Capital Analytics, a New York City-based research firm.