City’s burgeoning employment fosters household formation - by Tim Thompson

Tim Thompson, Marcus & Millichap

Strong economic growth has supported employment growth above the historical average in the first half of the year, which has pushed metro-wide unemployment to its lowest level in over a decade. Hiring has been led by the professional and business services, construction, education and health services sectors. Many of these jobs are in traditional high-wage positions, generating demand for housing with the latest amenities. In the core and surrounding areas, single people are finding roommates and renting larger layouts so they can afford living in luxury or well-located units. Families are also eyeing the metro’s larger three-bedroom apartment layouts. Overall, elevated demand is maintaining the metro’s strong rent growth. In particular, this has supported rent gains in class B/C units and larger layouts with multiple bedrooms as many households are more likely to afford an apartment versus purchasing a home in the desirable neighborhoods surrounding major employment hubs.

Employers have been busy adding new positions to payrolls and are on pace to add 60,000 jobs, which represents a 2.3% expansion to the workforce. As a flow of new residents move to Boston it is expected that additional job searches will begin, slowing unemployment contraction.

Tech and health companies are still expanding footprints and headcounts in Boston. Larger employers continue to maintain staffing in the metro, including Mass. General Hospital, EMC Corp., DePuy Synthes Companies of Johnson & Johnson, and Kronos. GE is currently in the process of moving staff from its former Connecticut headquarters to its new Boston location. Additionally, JetBlue, one of the largest airlines serving the metro, is also eyeing the area for further expansion. This corporate growth will translate to new employees and greater demand for residences. More than 3,000 individuals moved to the metro during the past 12 months ending in June, adding to household formation.

These strong hiring trends have advanced household formation by 12,200 during the 12-month period ending in June. During the same period, population gains totaled nearly 30,000, for a 0.6% annualized rate of growth. Rampant hiring by technology and science firms supported the 0.9% increase in the 20 to 34-year-old segment. These higher-wage millennials have a propensity to rent and are generating demand for well-located units. This is in contrast to other demographics seeking affordability and access to rail and highways. The median household income has increased 2.1% in the past 12 months to $79,500 annually, while the median home price rose at a more moderate 1.4% pace in the same time period to nearly $405,000. Many households do not qualify for a mortgage on a median-priced home, as the median household income is $12,600 short of the annual income requirement on the typical 10% down payment loan, thus necessitating some residents to remain renters.

Encouraged by the Boston’s positive growth outlook, builders have increased permitting activity. Nearly 5,000 multifamily permits were issued during the yearlong period ending in June and around 4,300 new single-family permits were issued during that same period. One of the largest apartment projects under construction is 345 Harrison of Harrison Ave. in the South End. When completed in 2018, the site will include 577 market-rate apartments within a 14-story complex. Another notable project is the 52-story Copley Place Tower, which is one of the tallest apartment developments underway in the core.

Due to Boston’s fundamentally strong economy and high and consistent rent growth, investment sales activity is bullish for multifamily assets. Institutional interest remains strong, particularly for class A apartment buildings in the core. High-net-worth individuals also continue to be active in the area and have demonstrated a willingness to assume greater risk with trades where properties offer upside potential but lower initial yields. Opportunistic investors have been eager to trade into Class B and C assets and assets located outside the core, which can offer first-year yields in the mid-5 to 7% range.

Tim Thompson is regional manager at Marcus & Millichap, Boston.