The Boston construction boom may yet prove sustainable, panelists at a presentation on the rise of residential construction in the city sponsored by NAIOP, the commercial real estate development association, said this morning.
With Boston weathering the recession better than most cities and the high costs of building, the current Boston metro-area market is "ungodly tight," said Hans Nordby, managing director of PPR, an analytics and advisory firm. According to PPR’s projections, while a considerable amount of fresh inventory is currently in the development pipeline, even when completed the new units are likely to simply bring Boston back on track with historical vacancy levels rather than lead to a glut.
Nordby was joined by Leslie Cohen, executive vice president of development for Samuels & Assoc.; Travis D’Amato, senior vice president at Jones Lang LaSalle; Steve Faber, executive vice president at Related Beal; and Sue Hawkes, president and CEO of The Collaborative Cos.
PPR estimates that while the current building boom may continue for a few years, it is likely to taper off around 2016, as a new mayoral administration coming into power will slow down project approvals, helping to cool developer’s enthusiasm as more units are coming online. Furthermore, with more young professionals wanting to stay in urban areas and a wave of young retirees looking to sell big houses in the suburbs to join them, the percentage of homes sales that are condos is likely to increase in the future, helping boost the prospects for urban development.
Indeed, the current market may already have reached an inflection point where condos begin to make more sense for certain projects than apartments. According to Faber, Related has already come to that conclusion with its Lovejoy Wharf project. "We felt that the condo opportunity would present us with the greatest return on investment," he said.
In other cases, moving to a mix of condos and apartments or condos and hotel rooms may prove more attractive, as mixed projects make it easier to provide the increasing amount of common space and amenities luxury buyers demand, while keeping price per square-foot and home owner association fees lower. For example, one of Related’s buildings will contain a full indoor basketball court as part of the shared space, Faber said.
However, questions remain at the very high end, pointed out Hawkes. Approximately 125 units were sold in the $2 to $4 million price range last year, she said. When many current projects are completed, Boston will have something like 1,500 units of inventory in that price range, she said.
"Where are all these people going to come from? What’s the profile buyer? At this point, most of the propulsion in the higher end is from a plethora of empty nesters who have decided they have an opportunity to sell their home in the suburbs. How deep is that market?" she said. "I think that’s the biggest question."
In the long-term, however, Boston must seriously consider loosening its permitting restrictions and perhaps subsidizing land purchases if it wants to be able to retain middle-class families and college graduates. With the currently high costs of land and labor in Boston, building anything but luxury simply doesn’t make sense, panelists said.
"People between [ages] 25 and 40 in Boston, they get out of college, they live here for a couple of years, sleep like puppies in some overcrowded apartment, they get sick of it and they go to Houston. If you don’t want that to happen, we have to build a hell of a lot of houses," said Nordby. Otherwise, he continued, "What you wind up with in a city like Boston is the middle class moves out, and you have rich people and the people who serve them lunch. And you have to decide as a city if you want that."
