Elevated Home Prices, Housing Shortage Keep Vacancy Tight in Boston Multifamily Market
A highly educated workforce is driving corporate growth throughout Boston, particularly in the finance, technology and medical sectors.
PNC Financial Services and JPMorgan Chase have announced considerable expansions and some international companies, including LogPoint, are setting up North American operations in the Boston metro. As a result, approximately 47,100 positions were created since October 2017, building on the 39,400 jobs added in the prior 12-month period.
The pace of hiring has kept the unemployment rate in the low 3 percent band, making it difficult for employers to find quality workers. Overall, healthy employment growth continues to draw more residents and underpins household formation, fueling the need for quality housing. High home prices, however, are putting homeownership out of reach for many, boding well for apartment demand. As a result, vacancy rates remain considerably tight, resting below 4 percent in the third quarter.
The still tight vacancy rate is creating a shortage of housing throughout Boston, particularly for lower income households. Consequently, vacancy in Class C apartments has held below 3 percent during the past two annual periods ending in September. Effective rent in these spaces is roughly between $700 and $1,800 per month less than Class A and B spaces, making it difficult for many individuals to transition to newer apartments. Continued household growth and net migration will drive further demand for apartments, particularly as construction moderates in the coming years.
Some renters may look to the outer suburbs, where lower rents persist. Vacancy rates in these neighborhoods, including in Plymouth County, Marlborough and Framingham, can typically rest below 3 percent, supporting strong rental increases above the metro average.
Further tightening in the vacancy rate will also be underpinned by declining construction in 2019, as 5,500 apartments are placed into service. Deliveries have averaged more than 7,000 units annually during the past five years as tenants demand quality spaces. Most of these completions have been luxury Class A apartments, which has kept vacancy in this asset class elevated above the metro average. Declining construction, however, and steady demand from working professionals will likely support improvement in the rate among this asset class moving forward, particularly as some owners offer concessions to lure more renters to these spaces. Overall, completions will remain relatively widespread this year, with Chelsea, Revere, Charlestown, and the Southwest Boston neighborhoods receiving the most deliveries – more than 900 units each.
The largest project scheduled for completion in 2019 is South Bay Town Center in Dorchester. The midrise complex will include 475 rentals and is expected to be completed in the fourth quarter.
Low vacancy and above national average rent growth will continue to sustain demand for apartment assets in the Boston metro moving forward. Limited listings in Back Bay, the South End and Downtown are elevating property values considerably in those neighborhoods. This may entice some owners to place their properties on the market.
Investors in the core are primarily bidding for smaller properties of less than 100 units that were built prior to the 1970s. Construction on several larger complexes is underway in close proximity to these areas, potentially providing investors additional opportunities at the top end of the market moving forward. Areas nearby to Boston’s several major colleges and universities will also sustain demand for multifamily investments, particularly in Cambridge. Here, properties changed hands upwards of $500,000 per unit on average.
Smaller and private investors in the $1 million to $10 million price tranche looking for lower entry costs and returns at least 100 basis points higher than those found in most Boston neighborhoods will focus on properties north of the core, including in Chelsea and Lynn. Both cities and their respective submarkets experienced considerable vacancy improvement and rent growth during the last four quarters. Complexes trading in both locales are typically older buildings built prior to the 1970s, which attract opportunistic investors.
First-year returns in Lynn averaged in the 7 percent band, compared with the 5 percent metro-wide average. Overall, strong demand has placed downward pressure on metro cap rates, which have declined 30 basis points year-over-year as of the third quarter.