Demand for Multifamily Units Keeps Pace With Increasing Supply in Boston
Despite the maturing commercial real estate cycle, Boston’s thriving economy continues to generate positive momentum for the metro’s multifamily property marketplace. Over the 12-month period ending June 30, 2017, area employers added 55,700 positions, growing the employment base by 2.1 percent. Job creation was driven by the typically high-wage healthcare and professional fields, and more than 30 percent of the new roles created were in office-using sectors. This healthy growth has supported a surge in household formation, which — along with the high cost of homeownership — is sustaining substantial demand for rental units.
The significant affordability gap between renting and homeownership favors renting over homeownership by $591 per month. This, in combination with rising office-using employment, continues to boost apartment demand, which will support this year’s robust construction pipeline. Developers are on track to deliver more than 9,500 units to the marketplace in 2017, marking the highest point of the current cycle. Builders have focused their efforts in the urban core, particularly in the Fenway, Brookline and Brighton submarkets, and in first-ring suburbs. Nearly two-thirds of incoming units will be inside the city limits or in the closest suburban markets like Cambridge and Revere. The two largest deliveries each contain more than 450 units and will be in the Intown Boston submarket, which includes the Financial District, Beacon Hill and Back Bay neighborhoods.
Despite the high quantity of new multifamily product hitting the market, rising levels of household formation with a demand for rentals in Boston’s core will limit vacancy, and net absorption will remain elevated through the remainder of the year.
In the yearlong period that ended June 30, Boston’s metrowide multifamily vacancy rate fell 60 basis points to 2.6 percent. The largest drop recorded was in the Cambridge/Somerville submarket, which declined 480 basis points to 3.4 percent. In North Essex County, multifamily is nearly at full occupancy with vacancy at just 1 percent. Although surging apartment demand will largely track deliveries, vacancy is expected to tick up 30 basis points to 2.8 percent metrowide this year. This small rise in vacancy will have little effect on rent growth.
In the trailing 12-month period ending in the second quarter, year-over-year average effective rents rose 4 percent to $1,882 per month metrowide. The Fenway/Brookline/Brighton submarket saw the most growth with rents rising 14.5 percent to $3,174 per month.
Through the end of the year, extraordinarily low vacancy will prompt an additional 5 percent rise in the average effective rent to $2,021 per month metrowide.
Multifamily investor attention and activity in Boston are high given the fundamental strength of the metro’s rental market and positive outlook for growth. Apartment buyers have broadly split into two pools: institutions seeking well-positioned assets in core submarkets and private investors searching in first-tier and second-tier suburbs for value-add opportunities.
Institutions seeking capital appreciation will pursue turnkey or moderate value-add opportunities. Cap rates for these assets will range from the mid-3 to mid-4 percent tranche in the core, depending on building location and size. Additionally, a considerable amount of deal flow has shifted toward first-ring suburbs, where cap rates can be up to 200 basis points higher for similar assets. For this reason, transaction velocity and dollar volume have risen considerably in these areas, especially for properties along Interstate 93 and inside Route 128.
— By Tim Thompson, regional manager, Marcus & Millichap. This article first appeared in the October 2017 issue of Northeast Real Estate Business magazine.