Think Boston multifamily is overbuilt or overheated? Think again.
Due to superb fundamentals and a slowing development pipeline, Boston is now regarded as the number one metro area for multifamily investment.
From 2019–2030, Boston will need to add 51,007 units to accommodate population growth, an average of 4,637 units per year. Recent development (2014–2017) averaged 3,334 units per year. Population and job growth are expected to remain strong, fueling continued demand for multifamily housing and countering arguments that the Boston market is overbuilt.
Many developers nationally are interested in the market. The construction pipeline for multifamily properties features organizations with headquarters as far away as Portland, Phoenix, and Dallas. The Houston-based Hanover Company, for example, has four properties totaling over a thousand units in the Boston development pipeline.
Boston is a seller’s market as well, with deals typically attracting multiple bids, and it is easy to see why. For investors, Boston is a market with an average cap rate of roughly 4.5 percent. This is the same cap rate as Raleigh or Central Florida — two markets generally considered to be more volatile than Boston in the case of a recession.
A Reliable Hub Becomes a Vibrant City
“Historically, people traveled to Boston for its world-renowned schools and hospitals and then left. This is no longer the case.”
– Travis D’Amato, Managing Director, Walker & Dunlop
Travis D’Amato,
Walker & Dunlop
The Greater Boston area has always been a steady employer, and it is home to leading medical facilities like Massachusetts General Hospital and the Dana-Farber Cancer Institute. According to The Boston Planning & Development Agency, Boston receives the highest amount of NIH funding of any U.S. city ($2.12 billion in 2018). Additionally, some of the world’s leading universities bring over 340,000 students from across the globe.
Now, people are coming to the Boston area to get smart and stay. Companies like Wayfair, Facebook and Google are expanding their footprints in Back Bay and Kendall Square. Digital companies like TripAdvisor, Grubhub and DraftKings have joined pharma giants like Merck & Co. Inc. and AstraZeneca and innovators in fintech and biotech to provide high-paying jobs to ambitious young professionals.
With developments such as the Seaport on the South Boston Waterfront, these workers have upscale dining and entertainment options. Encore Boston Harbor, a Wynn property and the state’s first casino, has hired 4,900 people so far and brings in business from as far as China, facilitated by direct flights between Boston Logan International Airport and metropolitan centers like Shanghai and Beijing.
The result: Boston has become a city of choice for companies and employees. Among 53 major U.S. metropolitan areas, Boston recently ranked fourth for job growth, according to the Wall Street Journal. The Bureau of Labor Statistics estimates that the state added 44,000 jobs from 2017–2018 alone.
“Boston has changed tremendously as a city over the last decade. There’s now a vibrant downtown with world-class restaurants and high-quality housing, and a revived Seaport district that’s attracting blue chip office tenants and top retailers. The historic ‘brain drain’ has become a brain gain.”
— Mike Coyne, Managing Director, Walker & Dunlop
Ample Opportunity Beyond the Urban Core
Life in the heart of downtown Boston is not cheap. The average home price doubled in the past decade, and rents are some of the highest in the country.
Moreover, many rental properties in this historic city are older— as in pre-World War I era construction. This, plus a lack of incentive to make improvements in a landlord’s market, often leaves renters searching high and low for options that meet their needs. Such trends create opportunity for multifamily developers, particularly in “outer urban” Boston, the area stretching from downtown to the outermost stations of the Massachusetts Bay Transportation Authority (MBTA or “T system”) and in the suburbs.
“If you’re not in the Boston market now, you’ll regret it five years from now.”
— Travis D’Amato, Managing Director Walker & Dunlop
In addition to being attractive to renters, outer urban Boston has a value proposition for developers and investors. Land costs three-fifths as much compared with urban development: $60,000 per unit versus $100,000 per unit. The return on costs is a full 50 basis points more, at roughly 5.5 percent.
Return on costs can be even higher (up to 6.5 percent) in the Boston suburbs. Furthermore, the 6,537 units currently in the suburban development pipeline are just the tip of the iceberg for meeting housing demand.
To illustrate the need, Cambridge Crossing has three fully leased new office buildings, totaling north of 1 million square feet, but as of yet no new housing. In Brookline, a 17-unit apartment building is only the second new rental property built in the suburb in the past decade. Rents start at over $3,000 per month.
It will be interesting to see how Boston developers and investors meet the growing multifamily demand.
Walker & Dunlop recently closed loans for:
- CityView at Longwood, a 289-unit high-rise property in Boston built in 1970
- Vinnin Square, a 148-unit garden property in Salem, Massachusetts, built in 2003
— By Travis D’Amato, Managing Director, Property Sales at Walker & Dunlop; Michael Coyne, Managing Director, Property Sales at Walker & Dunlop and Andrew Gnazzo, Managing Director, Multifamily Finance at Walker & Dunlop. Walker & Dunlop is a content partner of REBusinessOnline. For more articles from and news about Walker & Dunlop, click here.