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Market ReportsMassachusettsNortheast Market Reports

Boston Sees New Deliveries, On Pace to Set New Peaks for Rents

by admin

The Boston apartment market will remain in favor of landlords in the coming quarters as new developments surface and rents reach peak levels, although residents may seek more affordable living options. The improving employment picture and a severe shortage of supply within Route 128 have tightened vacancy below 3 percent. By year end, asking rents will reach new record highs, which has already ignited a building frenzy throughout Boston. Nearly 1,500 units are under way in Suffolk County. These units will come online by 2014 and may ease rent growth.

Meanwhile, demand in outlying areas is gaining steam as young professionals are being priced out of the core. Families and empty nesters alike are also migrating to the suburbs, where newer developments offer a sense of connection to the community similar to urban settings at more affordable rates. Developers are capitalizing on this trend and transforming areas near major transit stations into densely packed, master-planned communities. The redevelopment of the South Weymouth Naval Air Station, known as Southfield, is one example of this trend. The first phase of the mixed-use project in Norfolk County was recently completed and added 225 apartments, townhomes and top-notch amenities to the area.

By the numbers, since the second quarter of 2011, roughly 1,000 units have been added to Boston, increasing stock by 0.6 percent. The South Shore/Route 128 South received 40 percent of the supply, after builders completed two complexes totaling 400 units. The scarce amount of available supply has prompted builders to revive multiple projects put on hold during the recession. Nearly 4,000 apartments are under way in Boston, and once complete by 2014, inventory will grow 1.8 percent. The planning pipeline remains full with 15,000 units. Roughly, 5,000 apartments are proposed for the Central City/Back Bay/Beacon Hill submarket, with projects totaling 1,500 units expected to break ground over the next few years.
Year to date, demand outweighed supply-side pressures as tenants occupied nearly 1,200 apartments, reducing vacancy 40 basis points to a 10-year low of 3.6 percent. In the prior six months, vacancy also fell 40 basis points. In the last year, demand growth modestly cooled for Class A apartments, though vacancy decreased 70 basis points to 4.4 percent, which is 230 basis points below the 10-year average of 6.7 percent. The year before, vacancy fell 230 basis points. In the Class B/C arena, we saw a 150-basis point decrease in vacancy last year, but leasing momentum for Class B/C properties slowed in the most recent 12 months. As such, vacancy for B/C properties slid 90 basis points to 3.1 percent on positive net absorption of 1,350 units.
Since the beginning of the recovery, operators have raised asking rents nearly every quarter, including a 0.9 percent increase in the first half of 2012 to $1,761 per month. Effective rents finished the second quarter at $1,679 per month, growing 1.3 percent in the past six months. Averaging $2,155 per month in the second quarter, Class A asking rents advanced 1.2 percent in the past year. Class B/C asking rents outperformed in that time, recording growth of 2.6 percent to $1,485 per month. Fierce demand, coupled by tight supply levels in the Central City/Back Bay/Beacon Hill submarket, allowed landlords of Class A properties in the area to raise asking rents 4.3 percent from a year ago to $3,325 per month.
Sales activity will thrive for the remainder of the year as investors turn to Boston to escape overseas turmoil. As the headwinds in Europe persist and overall growth in the U.S. economy slows, institutions will seek safe havens outside the equities and bond market. Trophy assets in Boston will trade at initial yields in the high 4 percent range, which outpaces the average dividend and bond returns, while offering long-term revenue with less risk. As a result, competition will remain fierce for top-tier properties in the core, encouraging yield-seeking buyers to venture to the suburbs, where cap rates average above 6 percent. Smaller private investors with limited purchasing power, meanwhile, will target Class B/C properties. The large pool of students in Middlesex County as well as the 640,000 employees that work in Suffolk County will attract investors to those areas. If buyers use leverage to acquire lower-tier assets, the record-low cost of capital and cap rates near 7 percent will produce a favorable spread.
— Gary Lucas is the regional manager of the Boston office of Marcus & Millichap Real Estate Investment Services and a senior vice president and managing director of the firm.

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