Evan Griffith, Marcus & Millichap
Young professionals are flocking to Boston to find higher-paying jobs generated by fruitful healthcare and technology industries. Pharmaceutical companies like GE Healthcare, Amgen and Novartis AG are expanding in Boston and Cambridge. In addition, professional, business services, education, and health services sectors have all surpassed pre-recession employment. In 2015, companies in Boston are projected to create 43,000 new jobs, which is a 1.7 percent annual increase. The increased pace of hiring will support household formation and elevate the area’s housing demand. The Greater Boston region is experiencing one of its largest residential building booms in recent history. Most of the area’s proposed and under-construction residences are apartments and many of them are on the luxury end, including the Ink Block and Troy Boston on the South End, and the Zinc in East Cambridge. Multifamily inventory will expand 1.6 percent this year, resulting in a total delivery of 7,250 new units.
Many potential homeowners will choose renting over buying as more and more potential homebuyers prefer short commute times and the lifestyle that renting offers — a growing trend across many of the country’s major metros. Nationwide, apartments outperformed expectations for 2014. The national vacancy rate dipped as low as 4.2 percent, ending the year at 4.7 percent. Homeownership drifted to a 19-year low. In Boston, home prices in the most desirable areas like downtown, Seaport District, and Cambridge are significantly above the median price for homes in the area. Consequently, multifamily developers focused their attention in these areas and are slated to continue developing throughout 2015. Last year, strong tenant demand kept pace with the wave of new inventory and maintained a sub-4 percent vacancy. This year, however, new completions will put slight upward pressure on vacancy and, as a result, the pace of rent growth will slow. Specifically, average rents are expected advance 1.9 percent to $1,780 in 2015, putting the rate growth at 4 percent. By comparison, in 2014, rents surged 4.5 percent.
Multifamily transaction velocity will continue to be on par with Boston’s heightened activity in the market over the past two years. Regardless of steady buyer interest in local properties, consistent demand drivers and rent gains are limiting for-sale inventory. Owners have shown little motivation to divest and usually hold assets for long periods due to steady cash flow. Many of the listings that are available consist of older value-add buildings or Class A core product that targets a limited segment of the buyer pool. High-quality properties in the urban core will continue to garner strong attention from foreign investors, institutions and well-capitalized private buyers.
— By Evan Griffith, Senior Associate, Marcus & Millichap. This article originally appeared in the January/February 2015 issue of Northeast Real Estate Business magazine.