Boston’s apartment rental market has held its value remarkably well during the economic downturn; occupancy and rents have only decreased by a few percentage points, significantly lower than national averages.
What hasn’t held up is building construction: There are no apartment units slated to come online after the second quarter in 2010. So if employment stabilizes, both local and national analysts believe rents will rise in The Hub.
“I don’t really see any scenario where rent won’t go up, especially if forecasts for employment [losses] tapering off hold true,” said James Pennington, owner of Boston Apartment Advisors.
In the greater Boston/Providence market area, which includes southern New Hampshire, rents have decreased 1.5 percent from 2Q 2008 to 2Q 2009, according to MPF Research, a national apartment market analyst. The greatest decreases are outside of Boston: rents outside of I-495 have gone down by 5.7 percent in that same period.
But rents in and around Boston have decreased by much smaller margins during that period. Downtown Boston’s rents have decreased by only 0.1 percent, and rents in Cambridge, Somerville and Allston have gone down by 0.4 percent.
Meanwhile in the Greater Boston Area, occupancy fell to 93.5 percent in 2Q 2009, down from 94.6 percent from the same period in 2008.
Greg Willett, vice president of research for MPF, said Boston is a bit of an anomaly. The city has had significant job losses, but the apartment market has stayed incredibly strong.
“It’s the market across the country where the numbers really don’t make sense,” Willett said. “Why hasn’t Boston taken a hit? The job loss has been huge. The pieces of the puzzle just don’t fit as well in Boston as other places in the country.”
Willett said Boston’s apartment profitability has fallen about 2 percent since the economic decline, while the national average decline was more than 5.5 percent. Willet said through next year, only Boston, Washington, D.C. and Houston will remain one of MPF’s top-tier markets for revenue projection.
So with very few projects in the pipeline and supply set to dry up, landlords who made very few concessions to begin with will be in a prime position to take advantage of an improving economy.
“It’s been a while since there has been a meaningful start in Boston,” Willett said. “We’re going to be not delivering product. It really depends how well the economy is performing, [but] you can see some really meaningful increases in performances, in terms of both occupancy and in rents.”
Pennington, whose company focuses solely on the greater Boston/Providence apartment market, agreed. He said since the capital markets froze, any project that wasn’t already fully funded instantly stalled. Since about February, there have been no major multi-family starts, and a wide gap without new units is now traveling through the pipeline. When that gap reaches the market, inventory will sputter like a water nozzle pumping out only air, and that’s the environment where profitability will go up.
“If occupancy has held relatively stabile during the past turmoil, it can only continue to hold as things ease,” Pennington said. “[Rent hikes] will come first by concessions burning off; owners won’t need specials anymore to keep tenants. Those are substantial; one month rent free is an 8 percent special. For that to burn off is a significant event.”
Pennington said the submarkets with the most supply were the first to see concessions at all; those markets have had them for two or three years. The markets with shrinking supply will be the first to lose their concessions, and some markets, like downtown Boston, Cambridge and the western suburbs may never have had concessions.
Pennington added that while there has been some “shadow supply,” or condos converting into rentals, that rate had kept pace with the number of foreclosures that are occurring, where homeowners are being converted to renters.
The Boston Redevelopment Authority, or BRA, has been trying to reload the pipeline with projects so supply numbers won’t decrease quite so dramatically.
Jessica Shumaker, deputy director for Media & Public Relations at the BRA, said that 50 West Broadway in South Boston is set to deliver 139 rental units starting this quarter. She pointed to three projects that have been approved by the BRA, and another six projects that are “under review.”
But even projects that have site approval from the BRA are months away from breaking ground, if they even have the cash to build. Once they’re under construction, they won’t be set to deliver units to the market for another year.
Pennington said while the projects that have site approval in Boston are likely to see capital before projects in the suburbs, they still won’t deliver units for another 18 to 24 months, leaving a gap between 3Q 2010 and 2Q 2011.
“‘Approved’ is a far cry from ‘under construction,’” he said. “They can’t control the capital markets. I’m sure the BRA is optimistic in their projection of 2010 starts, which is understandable. Until capital starts flowing however, no one can be so sure.”
Debt Might Bring Opportunities
The opportunity for increased revenue may not be exclusive to current landlords. Both Willett and Pennington said maturing debt will place a huge burden on current owners, and could open opportunities for investors with capital to find cut-rate deals.
“If there were to be a large number of properties that need to refinance, I think you’d see a lot of distressed sales,” Pennington said. “Owners would have to come up with a lot of capital to meet the revised underwriting standards.”
“Something that we have to look for in every market is properties that have maturing debt on them that are really going to have a hard time refinancing,” echoed Willett. “We’re going to see a lot of properties that are distressed, and will be selling for below-market prices.”
