Boston is at the beginning of an unprecedented demographic shift and the strongest fundamentals we have seen in over a decade. With just under 4,000 units a year scheduled to deliver through 2016 and more than 7,000 renter households being created annually over that same time period, we are not building enough units to meet this wave of demand.
Boston is the Place to Be
The Boston multifamily market remains ones of the best-performing markets in the country. As a result, institutional investors view Boston as one of the top three most desirable markets, alongside New York and San Francisco. Their eagerness to deploy capital into Boston multifamily has resulted in unprecedented asset pricing and has stimulated new development throughout the region.
Institutional developers such as Hines, Jefferson Apartment Group, Mill Creek and Gerding Edlen have started their first projects in Metro Boston. Additionally, historically prolific developers in the area such as AvalonBay, Hanover, Criterion, National Development and Wood Partners have continued to build on their success.
Solid Fundamentals
Relative to most cities, Boston’s employment remained insulated through the downturn thanks in large part to a heavy concentration of jobs in healthcare, high-tech and life sciences. These sectors weathered the recession fairly well and have surpassed financial and legal services as the primary drivers of growth in our local economy.
In fact, as of September 2012, Boston had regained all of the 103,000 jobs lost during the recession. This economic resilience, combined with a lack of multifamily deliveries from 2009 to 2012, has caused metro-wide rents to grow by almost 19 percent from the last peak. Some especially strong urban submarkets have experienced growth of more than 30 percent. Vacancy now hovers around 4 percent, indicating a short supply of quality product.
Boston is also on the front end of an unprecedented increase in demand for apartments due to improving renter demographics. Baby boomers are becoming empty nesters and their echo boomer offspring are beginning to form new households. These generations are driving an annual increase of more than 7,000 rental households in eastern Massachusetts. This demand growth is unlike anything the region has seen in the past decade.
Development: Build-to-Core
Due to the imbalance of institutional demand and product for sale, investors have introduced a “build-to-core” strategy. They cannot buy enough core multi-housing product, so they build it. Increased demand coupled with a lack of existing product for sale has funded this development wave that started downtown and has expanded into suburban markets. “Build-to-core” investors require lower returns and have longer hold periods, allowing them to withstand short-term ups and downs in a stable long-term market.
The Urban Boom
Urban areas have been the overwhelming focus of developers. New luxury apartment towers are starting to deliver across the city. Approximately 8,000 units of urban, institutional-quality rental housing will be delivered through 2016. This wave of development is not an overzealous rebound. It is a long overdue transformation of Downtown Boston’s rental housing, which is supported by exceptional demographics and the well-documented trend of urbanization.
Noted in the chart above, the majority of these urban deliveries will happen in 2015 and 2016. Though we are confident these units will be absorbed by increasing demand, short-term vacancies will rise and there will be concessions as towers deliver 200 to 400 vacant units at a time. However, we believe rents will continue to grow in early 2014, leading up to this market change. These 8,000 units are a small fraction of the 175,000 rental units in the city of Boston and will help to overcome a dearth of high-end institutional rental housing in the city.
Cautious Optimism
Boston is not being overbuilt. Demographics are in our favor like never before, and the composition of the development pipeline fits well with the urbanization trend. Not enough quality multifamily product exists to meet the pent-up demand of renters or investors, and capital allocations are driving more and more institutional equity into the top few real estate markets. Our unrivalled educational institutions will continue to attract the top intellectual capital, and now we will have the modern housing and 24-hour lifestyle necessary to retain our graduates for the long run. We feel strongly that metro Boston multifamily will continue to thrive.
— By Travis D’Amato, Senior Vice President and Multifamily Expert, Jones Lang LaSalle. This article first appeared in the January/February 2014 issue of Northeast Real Estate Business magazine.