Boston, we have a problem. More specifically it’s a development problem. We’re not building enough multifamily housing.
Boston is at the beginning of an unprecedented demographic wave and the strongest fundamentals we have seen in over a decade. With just under 4,000 units a year being delivered through 2016 and over 7,000 renter households being created annually over that same time period, we are not building enough units to meet this wave of demand.
Boston Is The Place To Be
The Boston multifamily market remains ones of the best performing markets in the country. As a result, institutional investors view the city as one of the top three most desirable markets, alongside New York and San Francisco. Their desire to deploy capital into Boston multifamily has resulted in unprecedented asset pricing and has stimulated new development throughout the region. Despite many high profile developments rising before our eyes, opportunities do exist, with many hidden in undersupplied pockets in the suburbs.
Solid Fundamentals
Relative to most other cities, Boston’s employment remained insulated through the downturn thanks in large part to a heavy concentration of jobs in healthcare, high-tech, and life sciences. These sectors weathered the recession fairly well, and have taken over for financial and legal services as the primary drivers of growth in our local economy. In fact, as of September 2012, Boston had regained all of the 103,000 jobs lost during the recession. This economic resilience, combined with a lack of new multifamily deliveries from 2009-2012, has caused metro-wide rents to grow by almost 15 percent from the last peak. Some especially strong submarkets have experienced growth of over 30 percent. Vacancy now hovers around 4 percent, indicating a short supply of quality product.
Boston is now on the front end of an unprecedented increase in demand for apartments due to improving renter demographics. Baby boomers are becoming empty nesters and their echo boomer offspring are beginning to form new households. Adding fuel to the fire, the median marriage age continues to rise and single-family credit remains tight.
What does this all mean? Household formation, the primary driver for housing demand, is expected to strengthen to 1 percent for the next five to ten years. Close to 7,000 new renter households will be created per year in the Greater Boston area, double the historical rate.
Due to the imbalance of institutional demand and available product for sale, investors have introduced a “build-to-core” strategy. They simply cannot buy enough core product. So instead they build it. This increased demand, coupled with a lack of existing product for sale, has sparked a new development wave that started downtown and is expanding into the suburban markets.
This is a distinct shift from the last development wave, which was largely funded by shorter term, build-and-sell capital sources. These investors demanded higher returns, and had a more difficult time withstanding short-term ups and downs in a very stable long-term market.
The last wave of multifamily development in eastern Massachusetts occurred primarily in the suburban ring along Route 128 as developers took advantage of Chapter 40B. Close to 22,000 units were built from 2004-2008, nearly 70 percent in the suburbs. This time is different, as only 20 percent of our current pipeline is suburban.
The Urban Boom
Urban areas have been the overwhelming focus of developers over the last year. New luxury apartment towers are now sprouting up throughout the city. Approximately 7,800 units of urban, institutional quality rental housing will be delivered through 2016. This wave of development is not an overzealous rebound. It is a long overdue transformation of Downtown Boston’s rental housing, which is supported by exceptional demographics and the well-documented trend of urbanization.
Boston is not being overbuilt. Demographics are in our favor like never before, and make-up of the development pipeline fits very well with the urbanization trend. There isn’t enough quality multifamily product to meet the pent-up demand of renters or investors, and capital allocations are driving more and more institutional equity into the top few real estate markets. Our unrivalled educational institutions will continue to attract the top intellectual capital in the world, but now we will finally have the modern housing and 24-hour lifestyle necessary to retain our graduates for the long run. Boston area multifamily will continue to thrive.
Travis D’Amato and Michael Coyne are senior vice presidents and multifamily experts at Jones Lang LaSalle.
