With a real-time availability rate below 2 percent and consumers expecting a stronger economy, be ready for rents to rise between 3.5 percent and 6.5 percent in 2025. iStock illustration
As we approach the end of 2024, a look back at the previous year’s apartment data reveals that housing supply is still tight and rent prices continue their path upward.
Apartment price growth did decelerate in 2024 to 3.08 percent due in part to slightly increased rental availability. The current real-time availability rate in Boston sits at 1.81 percent, which is still low despite being up by 28.37 percent year-over-year.
The real-time vacancy rate in Boston is also very low at 1.09 percent despite being up 67.69 percent compared to last December.
This constriction in the supply level of available apartments is primarily due to the failure of new product hitting the rental real estate marketplace. Median days on market for Boston apartments is 15 days, which is down seven days year-over-year.
These data points combine to show that demand is still strong in Boston for rental units. The region could easily absorb 15,000 new units per year, and it wouldn’t impact rental pricing.
As we look ahead to 2025, we analyze the market trends both good and bad that have got us here to this point. In the spirit of ending on a positive note, we will start with the bad news first: The supply problem.
The Ugly: A Price Explosion
Over the past two years, Boston’s average rent price has increased by a margin of 12.65 percent amidst a historic lack of inventory. Boston’s real-time availability rate bottomed out at a record-low 0.68 percent in September 2022 as we recovered from the pandemic.
That led to a severe lack of choices for apartment renters.
When a landlord notices that inventory is low, they can try for a higher price or wait longer before dropping their price to fill their units.
As a result, Boston’s average rent price exploded by double-digit margins. From January 2022 to June 2023, rent prices surged by 20.1 percent, from $2,537 to $3,047.
The Bad: Little New Construction
Greater Boston’s declining new housing development has been a major contributing factor to the inventory shortages we’ve seen over the last few years.
Boston Mayor Michelle Wu was sworn into office on Dec.13, 2021, which ended a year where the biggest city in Greater Boston saw a record number of new housing units approved for construction. But new housing units permitted declined each year from 2022 through 2024.
Rising energy costs, surging inflation, cost of borrowing and onerous affordability requirements in Greater Boston’s core cities have crippled the ability for developers to make new construction projects profitable.
These confluences led to the decline in development we’ve seen over the past three years, and have effectively fanned the flames of surging rents by ensuring low apartment availability.
You cannot escape the invisible hand of supply and demand. Several years of erroneous energy and economic policies, inflation and anti-growth development rules and legislation got us to this point.
The Good: Potential Pro-Growth Comeback
But there is some good news. As we look towards 2025 more developers are starting to feel optimistic about the ability to bring much-needed supply to Greater Boston’s rental market.
Once we get back to a cohesive energy policy that provides a surplus of fuel, that will drive down costs across the entire construction industry.
Those ramifications cannot be underestimated. The construction industry is one of the most energy-intensive industries in the economy. When energy prices go down it also drives down inflation. Therefore, developers’ construction costs per square foot go down. This helps stimulate more affordable apartment rentals and homes for sale.
As energy costs decrease, the cost of borrowing will go down, and it could set off an explosion of pent-up development in the next 12 to 24 months, provided the right dynamics are in place.
With our energy sector now having the potential to be unshackled, we should see housing permits increase. Cheaper energy and material costs will help a lot of developers dust off their plans and initiate new construction. “Drill Baby, Drill” could lead to “Build Baby, Build.”
Pave the Way for New Projects
But the right elements need to be in place for that to happen.
Too many affordability requirements being forced onto developers nearly always slow down supply. They have the perverse effect on the marketplace of driving rents higher because less supply is created because they increase developers’ costs.
Efforts must be placed on zoning reforms, incentives and risk mitigation for developers. There is growing chatter within the development community that if we placed a temporary moratorium on affordability requirements, we could get dramatically more projects underway. Therefore, vast supply increases could help create more affordable housing by driving down lower rents.
Demetrios Salpoglou
We really need to see about a 6 percent real-time vacancy rate to have lower rents and more options. Clearly the existing track we have tried for the past three years has failed.
Now, it’s important to note the new economic climate we are about to enter will not have an immediate impact on the rental market. An increase in new housing permits in 2025 will not have any meaningful effect on housing inventory for at least 12 to 24 months as new projects break ground and work toward completion.
However, the powerful combination of a stock market on fire, businesses’ anticipation of less regulation, a reduction of taxes and lowering inflation cannot be underestimated.
More people are willing to pay a higher rent when they are keeping more of their hard-earned money. We will see higher rents because people are perceiving that better economic times are ahead. With an assured low apartment supply in 2025, better economy and policies, we are anticipating that rents will rise between 3.5 percent and 6.5 percent in Boston.
Demetrios Salpoglou is CEO of apartment listing service Boston Pads.
