GIVEN TODAY'S ECONOMY, things could be a lot worse in Boston.

Steady growth in health care and education, combined with a fi nancial sector centered on a stable wealth management business, have helped Boston absorb the shocks of the global downturn better than most cities.

Boston lost 46,954 jobs over the past 12 months ending in April '09, driving the local unemployment rate to 6.7 percent versus a national unemployment rate of 8.9 percent at the end of the same period. While Boston job losses have been most pronounced in construction and manufacturing, the education and health care sectors have grown nearly 2 percent year-over-year.

Still, fundamentals in greater Boston's apartment market have weakened in certain submarkets. Overall, the apartment market had been holding strong with increasing rents through the third quarter of '08. But with the softening employment market and the continued delivery of new units, vacancies have increased and rents have declined in suburban submarkets.

Vacancy increased from 5.9 percent in the fi rst quarter of 2008 to 6.4 percent in the fi rst quarter of 2009 in greater Boston. Despite this increase in vacancy rates, eff ective rental rates in the region had increased by a healthy 2.7 percent to $1,644 per unit by the end of 2008, but exhibited a 0.4 percent drop in the fi rst quarter of 2009. Properties in Boston and inside the Route 128 belt continue to show the strongest fundamentals of the greater market.

The strength of each submarket has a direct correlation to the strength of its offi ce market and lack of new supply. The Route 128 West and Framingham/Natick markets are clearly the leaders of the suburban markets, thanks to the strong offi ce market conditions and dearth of new apartment supply.

Private Capital

The reemergence of private capital as the dominant buyer group is now setting the tone in Boston.

For the most part, institutional investors and REITs have remained on the sidelines here of late. The void left by these institutions pulling out and the rise in capitalization rate have allowed private capital buyers to come back into the market, given their renewed ability to generate positive leverage in a transaction.

While 2008 sales declined 76 percent from 2007 levels, keep in mind that '07 was an anomaly. In fact, the $388.6 million in 2008 sales volume—for deals of $10 million or more—approached the levels of 2002 and 2003, which were considered benchmark years in the multifamily market.

Although transaction velocity has slowed considerably—the fi rst quarter of 2009 saw no market-rate sales of more than $10 million—a pipeline of roughly $485 million in transactions is currently under contract in the area, mostly driven by private capital.

Supply and Demand

Deliveries in the greater Boston area totaled 5,984 units across 22 apartment properties in 2008, representing 3.1 percent of the professionally-managed apartment inventory and 0.8 percent of the overall rental inventory. This follows two years of healthy production, with 4,429 units delivered in 2007 and 5,300 units delivered in 2006.

A majority of the development was driven by merchant builders and REITs such as AvalonBay Communities, Fairfi eld Residential, and The Hanover Cos.

A total of 2,862 units in 14 communities are expected to deliver by year-end. The pending deliveries include the 350-unit Charles River Landing in Needham; the 259-unit Avalon at Blue Hills in Randolph; and the 222-unit River's Edge in Medford.

But very few new communities are expected to be built beyond 2009 given the current state of the capital markets. Deliveries are expected to drop off to 1,469 in 2010, and a miniscule 568 in 2011.

Looking Forward

While job creation is the ultimate driver of apartment demand, it's apparent that Boston's student population has had a positive impact on the market. With more than 265,000 students in the greater Boston marketplace and more than 51,000 people employed in the higher education fi eld, it has counterbalanced much of the declines in other sector job losses.

The higher education business is one reason why the immediate Boston and Cambridge submarkets have outperformed the greater suburban markets. Going forward, projected employment growth in the health and education sectors should continue to off set potential losses in other sectors throughout Boston.

And the limited pace of new supply coming online over the next two years should position the market well for another long-term run of vacancy declines and rent growth.