By Simon Butler, vice chairman, CBRE; Biria St. John, vice chairman, CBRE; John McLaughlin, senior vice president, CBRE; and Colleen Pentland Lally, vice president, CBRE
As we emerge from pandemic-era lockdowns and restrictions, Boston’s multifamily market is proving once again to be extremely resilient.
With businesses, offices, restaurants and leisure activities rapidly returning to normal, both the overall economy and multifamily fundamentals are rebounding with a velocity that has far outpaced industry expectations to date.
Throughout the winter and spring of 2021, job recovery has been swift in the metro Boston region, with employment levels now over 92 percent of pre-pandemic levels, according to the Bureau of Labor Statistics (BLS). The positive momentum is translating into remarkable near-term recovery and growth within the multifamily market.
The overall health, stability and resiliency of the greater Boston region is a direct result of the highly skilled and educated labor force, which continues to attract high-paying jobs across the technology, medical, pharmaceutical and educational sectors, among others.
Metro Boston is also home to the largest life sciences cluster in the nation, where the local economy has benefited and will continue to benefit from the stability and growth in this industry.
In fact, according to BLS data on scientific/R&D employment in Boston, this sector was immune from the disruption of COVID-19, growing its head count by over 9 percent (6,300 positions) between February 2020 and May 2021. Overall job growth in the Boston metro is forecast to climb 10 percent in the next two years, according to CBRE Econometric Advisors (CBRE EA).
Strong demand for quality housing — both rental and for-sale product — is being driven by several factors. Looking back to the pandemic-induced rush for lower-density living for families and an affluent, newly mobile virtual workforce, suburban home sales skyrocketed across the country.
Many of those seeking the shelter of the suburbs were city-dwelling millennials who were already considering a move. The pandemic accelerated this life stage shift for this cohort. However, as the pandemic subsides, pent-up housing demand for those eager to return to urban cores will be a powerful driver of the rental housing recovery.
According to CBRE EA, this pent-up demand is already translating into rising rents in the urban core submarkets across major U.S. cities that were hardest hit throughout the pandemic. The national economic rebound and fiscal stimulus payments have both had meaningful impacts on rents and occupancies.
According to a recent CBRE report, the national multifamily vacancy rate stood at 4.7 percent through the first quarter of 2021, only 50 basis points higher than the prior year. Effective rents fell 4.2 percent year-over-year but rose 0.4 percent in the first quarter of 2021 alone.
Notably, a recent analysis of RealPage data by CBRE’s research division revealed that intown Boston had the highest March-to-May effective rent growth among the metros that were analyzed at a staggering 9 percent.
In May alone, Boston’s month-over-month rent growth was 6.5 percent. Concessions are still burning off in the infill submarkets but are rapidly disappearing. CBRE EA is forecasting sustained rent growth in Boston to remain well above annual averages, with projected 9 percent annual growth through 2022.
In addition to outsized rent growth, 2021 net absorption level is projected to hit a number — 13,420 units — that Boston hasn’t witnessed in recent memory, according to CBRE EA forecasts. This demand for rental apartments outpaces completions and is creating demand for urban infill development opportunities.
However, given Boston’s inherent land constraints, the pipeline for available urban sites is rapidly shrinking. Developable parcels are often claimed by lab and life sciences developers who can substantially outbid residential projects. This is due to the fact that life sciences users can command higher rents — in some cases more than $100 per square foot net — thus allowing developers of that product type to be able to pay more for land.
This, combined with increasing affordability requirements across the city and a challenging permitting environment, creates a prohibitive landscape for multifamily development. Consequently, rentable apartment completions are forecast to remain far below recent levels in metro Boston from 2022 through 2026.
Unlike other recessionary periods, including the Great Recession, investment levels remained quite strong during the pandemic, with U.S. investment volume totaling $145 billion in 2020. Investors were focused on lower-density suburban assets as urban infill property performances were most severely impacted by the pandemic.
In Boston, multifamily investment sales volume for 2020 totaled $2.8 billion, down from a record-breaking $4.25 billion in 2019. Total sales volume through May 2021 totaled just over $1 billion, with April alone seeing a 500 percent increase in deal volume year-over-year. What’s more, pricing has remained strong despite the pandemic, with cap rates compressing 50 basis points since the second quarter of 2020 and per-unit prices surpassing pre-COVID levels.
Investment demand for submarkets in Boston’s urban core is now being tested after remaining relatively quiet throughout the pandemic. Given the low levels of new supply, strong projected rent growth, increasing renter demand and impressive pace of job creation, there is considerable optimism that urban core assets of all varieties will be received favorably in the market. For the few properties that are on the market, investors are taking all the recovery factors into account and are aggressively underwriting sustained growth over the next couple of years.
Turning the focus to resident preferences, the question of what renters are looking for in an apartment community in the post-pandemic world remains top of mind. Interestingly, the newest trends in multifamily amenity design were emerging before the words “pandemic,” “quarantine” and “social distancing” became part of our everyday lexicon.
These features include outdoor living spaces, work-enabled flex spaces, safe package acceptance solutions and flexible fitness and wellness spaces. The pandemic and related lockdown restrictions simply accelerated the value that these spaces create for renters of all types.
We do not believe that use of traditional office space will become a thing of the past, but that flexibility in terms of where people work and live is here to stay. Renters today want more space in their individual apartments to work, be active and relax.
They also value the ability to work in multiple common spaces safely and effortlessly. Buildings with thoughtful design, integrated technologies and powerful connectivity will continue to be rewarded in the marketplace.