Supply of multifamily investments still tight in Metro Boston - Tim Thompson

Boston’s multifamily market continues to benefit from the metro’s thriving tech and startup scene. Employment growth and household formation remain strong, but the cost of homeownership remains prohibitively high. In the first quarter of the year, renters in the metro, on average, paid significantly less per month than their homeowner counterparts, based on the median price of a home in the metro with a 30-year fixed-rate conventional mortgage.

Employment growth in Boston overall increased one percent year-over-year, and as of the end of the first quarter, employers had created nearly 26,000 positions in the preceding 12 months. Of those, 13,000 were in the professional and business services sector and approximately 7,600 were new construction jobs. In the past 12 months, the unemployment rate has ticked down 40 basis points to 3.1 percent and the tight market is making it difficult for employers to find quality workers. 

The increase in construction jobs is a reflection of the rising pace of apartment construction in the city over the past five years. This trend will continue through at least 2019, and by year end, 8,000 new apartment units are slated for completion. 7,800 units came online in 2017. Metro-wide, roughly 11,700 apartments are underway. 

Much of the new apartment stock is concentrated in a few select submarkets, most notably Boston, Quincy and Cambridge/Somerville. In Quincy, there are 1,500 units under construction, including the 492-unit Elevation Apartments at Crown Colony. That project began lease-up last fall and is slated for completion in October. 

The largest apartment project under construction within the metro is Boston’s 345 Harrison Ave., which is located in the South End and is comprised of two 14-story buildings. The project includes 585 luxury apartments with underground parking and 40,000 s/f of ground-floor retail, including a 10,000 s/f CVS Pharmacy.

Continued apartment construction has begun to weigh on vacancy. The year-over-year net absorption of 7,700 units did not outpace construction, and vacancy rose to 4.3 percent. Completions will likely hit the cyclical peak this year and lift vacancy slightly before units begin to lease. Vacancy has remained below five percent since 2010 and several areas of the city registered increases in occupancy over the past four quarters. Chelsea, Revere and Charlestown posted notable increases in occupancy levels over that period amid few completions and healthy demand. However, that area may see an influx of supply depending on the future of East Boston’s Suffolk Downs site.

Despite this year’s uptick in vacancy, the metro continues to experience above-average rent growth. The average effective rent is expected to climb five percent in 2018 whereas it increased four percent in 2017. 

Across the metro, which spans from the Rhode Island border to Manchester, NH and includes Worcester to the west, the average rent climbed to $2,221 per month as of March. Rent growth was led by Class C apartments, which posted a 6.2 percent increase year-over-year to a metro-wide average of $1,511 per month. Vacancy in Class C apartments sat at 3.2 percent as of March, the lowest amongst all classes of apartments in the metro. 

In Boston, favorable fundamentals have resulted, for many years now, in bidding wars amongst investors for the city’s still tight supply of multifamily investments. Multifamily pricing in Boston is at an all-time high. Transaction velocity is also up over the past four quarters and healthy demand has increased the average price by upwards of three percent across the metro during that period. Most of the trades on record over the past year involved the sale of smaller buildings and complexes of less than 100 units that were built before the 1970s. The number of these transactions has increased steadily year-over-year for the past five years. 

Home to some of the metro’s largest employers, Boston core continues to garner investor interest. Strong demand and few listings in the core have kept property values elevated. Properties trade with first-year returns in the high-3 to low-4% range. Buyers looking for higher returns and those who have been priced out of the core are looking to suburban submarkets. 

Over the past 12 months, transaction velocity has increased in submarkets to the north such as Chelsea, East Boston and Revere. Here, initial yields in the 5 to 6% range can still be found. More out-of-state buyers, mostly from the Eastern United States, are attracted to Boston metro apartment properties as of late, and demand for Boston multifamily investments is expected to remain strong due to the metro’s solid underlying fundamentals.

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