By Steve Callahan Jr., vice president of business development, Callahan Construction Managers
Despite the turmoil caused by the COVID-19 pandemic, Boston has experienced significant job growth over the last 12 to 18 months in the life sciences, healthcare, technology and finance sectors.
The health of these industries will require that employees in these fields have access to much needed, reasonably priced housing as companies continue to grow and build, creating more local jobs.
Steve Callahan, Jr., Callahan Construction Managers
Demand for rental housing over the past few years has been mostly driven by millennials who work in these fields. This trend is expected to continue as young professionals in these sectors no longer need to commute to the office by virtue of the pandemic forcing many companies to adopt work-from-home programs. In addition, these renters are seeking to upgrade to larger units with more modern amenities and access to outdoor spaces and activities.
More than 7,100 units were delivered last year in the Boston area, only slightly less than the cyclical high of nearly 7,500 apartments added in 2018. However, most projects that were either started or delivered in 2020 were aimed at lifestyle renters in or near Boston’s city center. This could spell trouble for Boston’s upscale rent growth in the short term due to high rents in the area causing tenants to look outward toward the suburbs.
The COVID-19-induced recession impacted urban submarkets much more than suburban ones in 2020. As a result, suburban submarkets will lead the multifamily sector’s recovery in 2021 while urban submarkets will lag, according to a new report from CBRE.
The appeal of the urban market has been reduced by remote working requirements, the closing of urban amenities, the reluctance to use public transit and a desire for more living space and greater access to the outdoors. In addition, the high cost of living of urban apartments intensified the decline of these submarkets and this product type, as millennials are reaching life stages where urban living is often traded in for larger housing options in less-dense submarkets.
All that said, there are no indications that 2020’s decline in urban multifamily demand is permanent, even though urban submarkets will lag in the multifamily sector’s overall recovery. Less-expensive suburban submarkets held up well in 2020 and are positioned to lead overall market performance in 2021.
CBRE forecasts a return to pre-COVID vacancy levels and a 6 percent increase in net effective rents over the course of 2021, with a full market recovery occurring in early 2022. The economic rebound will lead to rising multifamily demand, largely from increasing remote working flexibility and “unbundling”— a term that describes certain renters moving out of their parents’ homes or those of friends — as job opportunities provide more financial freedom to live independently.
Despite headwinds, developers recognize the long-term potential for new, investment-grade assets in gateway markets. Freddie Mac sees several reasons for optimism that the multifamily market will rebound in 2021, including a boost in originations and positive rent growth in most markets.
We are still seeing solid interest for apartments just outside Boston, and Callahan is currently working on multiple multifamily developments in the Greater Boston area that have recently broken ground or are expected to in 2021. These projects include Broadstone Watch City in Waltham, 5 Washington Street in Brighton, Breakwater in Lynn, Parkway Apartments in West Roxbury and Emblem 120 in Woburn.
As the risks associated with the pandemic start to dissipate, many tenants will continue to demand enhanced features and amenities such as fitness centers, pet areas, larger updated kitchens, coworking spaces and proximity to coffee shops and restaurants to suit their new lifestyle and increased spending capacity.
More importantly for the apartment business, the percentage of apartments that are vacant has not risen much since the pandemic began — even among the hardest-hit luxury apartments. Just 5.4 percent of Class A apartments were empty at the end of 2020, up from 4.7 percent the year before, according to Marcus & Millichap.
As industry veterans, Callahan remains confident that demand for apartments will stay strong, and that demand will continue to drive construction to meet future needs.