MP Boston is marketing 314 luxury condos at its Winthrop Center tower on Federal Street in downtown Boston, which is scheduled for completion in early 2023. Photo by Andrew Haigney
As we close out the first half of 2022, the Batterymarch Back Bay Index (BBBI) registered a year-to-date price gain of 8.9 percent on a 31 percent decline in transaction volume. This compares to a modest 2.6 percent price gain on a 24 percent increase in transaction volume for calendar year 2021.
This year got off to a strong start and we even had a scattering of suburban-esque bidding wars, predominantly in the South End. The market strength was well illustrated with the lightning-quick sellout of Hexagon Properties’ nine-unit redevelopment at 29 Commonwealth Ave. in the Back Bay. Prices there ranged from $8.5 million to $21.75 million. The project’s average selling price per square foot came in at an eye-opening $3,200 with an average of seven days on market – you’d think they were giving them away.
It hasn’t been all fun and games for every developer. In stark contrast to Hexagon’s success, over on the back side of Beacon Hill the developer of The Archer recently slashed prices by 8 to 10 percent. By our calculation, only 29 of the 62 units have sold after three years of marketing.
Activity remains brisk in the Seaport with 46 condominiums changing hands year-to-date. The hot Seaport property is still 22 Liberty Drive where three units sold quickly fetching an average $2,641 per square foot. The bulk of the Seaport activity has been driven by a seemingly endless supply of new units at the Echelon.
Liquidity Is Deteriorating
Overall, we’d chalk up the strong first half price performance to three main factors: the backward nature of real estate sales, as many first quarter closings were deals negotiated in late 2021 before rates moved up; pent-up demand coming off the seasonally slow winter; and buyers scrambling to lock in low-rate mortgages.
However, the 31 percent decline in transaction volume in the BBBI is cause for concern. Currently, Back Bay condominium inventory is about 20 percent above 2019 pre-pandemic levels, and units that have gone pending are trailing 2019 by 13 percent. Add to that widespread price reductions across all price points and you’re looking at a meaningful deterioration in market liquidity.
The culprit behind the market slowdown is clearly higher interest rates. Conforming 30-year mortgage rates have spiked to 5.5 percent from around 3 percent at the beginning of the year. We hear banter from the Realtor community that 5.5 percent mortgage rates are still historically low. That is true in the very long historical picture, but it should be recognized that mortgage rates are at a 14-year high.
In Downtown, Don’t Fight the Fed
It’s clear that the cheap money Goldilocks narrative for real estate is shifting; market sentiment can be fickle and turn quickly. Inflation-driven higher interest rates are weighing on valuations. We’re concerned about the ramifications of quantitative tightening as the Federal Reserve begins to unwind its $9 trillion balance sheet. We’re in uncharted waters on that front.
We’re advising clients to be wary of new developments with high investor activity. As mortgage rates declined over the last decade, the stock of downtown luxury condominiums exploded. A good old fashioned interest rate cycle will stress-test the values in these developments and may shake out speculators.
We’re keeping a close eye on three high profile luxury developments that are currently in full marketing mode – the 114-unit St. Regis Residences in the Seaport, 314-unit Winthrop Center downtown and the 146-unit Raffles Back Bay Hotel and Residences. If JPMorgan’s CEO Jamie Diamond’s prediction for an “economic hurricane” materializes, these developers could be forced to make attractive deals.
We continue to recommend that buyers focus on reasonably priced, good quality properties in traditional blue-chip locations. The good news is that the downtown market didn’t get caught up in the pandemic-driven real estate feeding frenzy, and that should cushion any downside. Sellers should recognize the Fed-induced liquidity squeeze and resist the temptation to overprice their properties – don’t fight the Fed.
Andrew Haigney is principal of The Batterymarch Group.
