GEORGE J. FANTINI JR.
‘Two pots of money’
Its 95 percent occupancy mark and lofty rent levels would be the envy of many regions nationally, but the Bay State apartment market has slipped substantially of late, developer John G. Weigel IV told attendees last Tuesday at an industry forum focusing on the multifamily sector.
“2002 was hardly a banner year for multifamily rental housing,” Weigel said in his remarks at Boston’s Swissotel. The Forest City Residential Group vice president cited several reasons for the apartment market’s lingering woes, including employment fallout from the dot-com bust and record-low interest rates, which have allowed many longtime renters to buy their first home.
After apartment occupancy peaked at 98 percent and median rents rose 39 percent over the previous seven-year period, conditions have worsened in Greater Boston since mid-2001, Weigel said, to the point that landlords are now offering concessions of one to two months’ free rent to entice tenants. The discount equates to a decrease in income of 8 percent to 16 percent, although prime Boston neighborhoods such as the Back Bay and Beacon Hill are still achieving rents as high as $2,415 per month, or about $2.77 per square foot.
Interestingly, the upper-end of the multifamily spectrum has borne the brunt of the problems on the occupancy scale. Whereas Class C apartments are sporting a 96.5 percent occupancy rate and Class B units are at 96 percent, Class A units are averaging 94 percent. “That’s a significant hit,” Weigel said of the luxury market. Prior to the dip, Boston was regarded one of the nation’s leading apartment markets, he said, in line with rental and occupancy rates achieved in San Francisco and New York City.
In some respects, Boston is still a popular target for multifamily investors and lenders, panelist George J. Fantini Jr. said in his presentation at the program, which was sponsored by the National Association of Industrial and Office Properties and MassDevelopment. “There are two pots of money from lenders,” Fantini said, one brimming over with funds for functioning apartment properties and the other – for unbuilt projects – virtually empty at present.
“There is a tremendous amount of money available for existing and cash-flowing deals, but much less for development,” said Fantini, the chairman of Fantini & Gorga/iCap Realty Advisors. “People should understand that.”
On an existing property, Fantini said he could line up financing from a whopping 30 different lending sources, including conduits, insurance companies and commercial banks. The only potential takers for undeveloped sites, however, would be union pension funds and certain banks, with others deeming that arena too shaky in the current environment. And any deal that did move forward would require at least 20 percent to 30 percent true equity, Fantini added, as well as other mandated guarantees. “There’s simply no way around that,” he said.
‘Up for Grabs’
Weigel concurred that apartments garnered widespread investor interest last year despite the failing fundamentals. The largest of the deals was the $500 million sale of the Flatley Co. portfolio, with a Denver real estate investment trust paying an estimated $115,660 per unit for the 4,323 units. The capitalization rate was 7 percent, the same as that in the $85 million sale of the Gardencrest Apartments in Waltham. That deal with Home Properties of New York comes to $122,700 per unit. On the lower end, Cannata Corp/DSF Advisors paid $27 million, or $67,669 per apartment, for the 399-unit Town and Country complex in Plainville.
“It’s quite remarkable what is going on,” said Fantini.
One key reason why apartments have tended to retain their value in the Boston area has been the barriers to entry, Weigel said, but he joined other panelists in voicing concerns about local and state officials adding even more impediments to multifamily construction. Along with the “chilling effect” a return of rent control would have on multifamily development, Weigel said the potential threat to Chapter 40B – the state’s so-called anti-snob zoning law – requires the prompt attention of the development community.
“There is a danger Chapter 40B will be amended or repealed,” said Weigel, who estimated that pre-development costs for a multifamily project can already cost upward of $500,000 just to determine whether the proper permits can be obtained. Others joined Weigel in warning of potential threats to the law, including indications that the new administration of Gov. Mitt Romney may support alterations to Chapter 40B.
Were that to occur, it would not be the first time in the legislation’s 34-year history that it has been attacked or rendered impotent, land use attorney David M. Abromowitz noted in his remarks. Although the bill’s mandate is to allow affordable housing construction to be built in a community without political interference at the local level, Abromowitz said various state administrations have limited Chapter 40B’s scope in recent years, usually under pressure from suburban communities opposed to new housing.
Under the Swift administration, for example, there have been 15 changes in the last 18 months that have impacted Chapter 40B’s effectiveness, said Abromowitz. Among them is a doubling in the number of units before a project can quality, while a community is also now allowed to reject a 40B plan if a non-40B development had been proposed for the site within the previous 12 months. The state also has expanded its definition of an affordable housing unit, making it easier for a community to claim at least 10 percent of its housing stock is considered affordable. A developer can only use Chapter 40B if less than 10 percent of the community’s housing stock is deemed affordable.
Massachusetts is already near last in the production of multifamily housing, Abromowitz said, and the additional restrictions on Chapter 40B will do little to encourage new construction. “Right now, there is effectively no land zoned for multifamily housing in any town in Greater Boston,” said Abromowitz, with large cities such as Boston bearing the brunt of that burden within the Interstate 495 loop.
Even after the recent regulatory changes have watered down Chapter 40B, Abromowitz said there continues to be an assault on the measure. Currently, he said, there are 68 bills before the Massachusetts Legislature that would alter or dispose of Chapter 40B. “Much is up for grabs,” Abromowitz warned.
MassDevelopment itself is working vigorously to promote affordable housing, board Chairman Robert L. Beal said in his remarks at last week’s program, which was moderated by Keybank National Association Senior Vice President Susan W. Leff. “From the point of view of this agency, we have made a major commitment toward the area of housing,” said Beal, noting that MassDevelopment offers a range of tax credits and loan guarantees to encourage residential development. The agency has committed more than $730 million to finance 135 housing projects in the past two years, Beal said, including an ongoing project in Boston’s South End that will yield 184 units.
