Boston’s high-flying luxury apartment market is surely headed for a landing of some sort. The only question now is what just exactly what kind of landing it will be.
Will it be a bit bumpy, but mostly smooth, glide in which rent growth stalls out, vacancies increase and plans for new luxury towers take a breather?
Or will it be a crash landing that will see vacancy rates soar, rents plunge and a few unlucky developers of gold-plated downtown digs with $6,000–a–month rents lose their shirts?
For the pessimists who look at all the posh new high-rises in Boston and its environs and see a bubble about to burst, there are some new stats to brood over.
Thousands of Luxury Units Hit the Market
First up is the growing vacancy rate in the luxury rental market, pegged at around $2,700 a month and up, according to real estate data and research firm CoStar Group.
The new apartment high-rises in downtown Boston and the Seaport are most visible, but the luxury rental building boom has spread its wings deep into the suburbs as well.
Expected deliveries of units. Source: CoStar Boston Multifamily Market Report Feb. 2019.
There are now more than 71,000 luxury apartments in Greater Boston, with much of the new rental construction taking place in that deluxe category.
The vacancy rate for the luxury market, including new properties just leasing up, is 7.4 percent, considerably higher than the average for the entire market, according to CoStar.
And that number is poised to go even higher, with 10 percent of all luxury apartments in the Boston area projected to be vacant by 2020, CoStar said.
Why? One big reason is a big bump in new supply, with the luxury rental building boom expected to peak over the next two years.
The last two years have seen 14,700 new apartments come on line through the Boston area.
However, the next two years will see a veritable glut of high-priced, new buildings expected to open their doors in 2019 and 2020, bringing online more than 20,000 new apartments, most of them luxury.
The influx of new supply is likely to mean, at the least, a slowing in rent growth and a rise in concessions, like free rent.
A fifth of all available luxury units in 2018 had a rent special as a sweetener. That number doubled in the Seaport/South Boston, with rent specials offered for 40 percent of all available luxury units in the neighborhood.
“As the ultraluxury product keeps rolling in, the question for many in the metro is, how many more deep-pocketed renters are out there?” CoStar New England analyst Peter Conway wrote in a recent report on the Greater Boston rental market.
Expected Boston multifamily vacancy rates. Source: CoStar Boston Multifamily Market Report Feb. 2019
Market Reins In Building – for Now
The pessimists and doom-and-gloomers are likely to wind up disappointed in the end.
While the luxury market’s landing could get a bit bumpy over the next two years as thousands of new units hit the market, there’s no looming collapse on the horizon.
There’s a recent precedent for the big bump in luxury supply in the pipeline. Thousands of new apartments hit the South End and Back Bay in recent years, driving down rents. But the apartments filled up and rents at the top of the market are growing again in both neighborhoods.
There are also signs that market forces have already begun to rein the luxury building boom.
New construction starts on luxury projects – which would then open in late 2020 and 2021 – have begun to drop off.
Not wanting to get too overextended in the luxury development market, local banks are looking at new projects more critically.
And construction prices are also throwing off developer’s projections, rising 8 percent. That’s far faster than rents are growing, and it is giving some builders pause.
Most investors, though, continue to be high on the Boston apartment market, including luxury buildings, and are bidding up prices when they come up for sale.
Beacon Hill’s seven-unit Maison Vernon condominium development opens this year. More than 20,000 new apartments, most of them luxury, are expected to hit the Greater Boston market in 2019 and 2020.
Market Newcomers Power Rental Sector
While there is hardly an endless supply of renters out there able to shell out $3,000 a month, the demographics in the Boston market have been especially favorable for such high-end construction.
The last decade has seen an influx of well-compensated newcomers in tech, biotech and research, not to mention traditional mainstays like our big health care and academic institutions.
While highly paid, many of these New Economy migrants also have high student debt loads, making renting, rather than buying, the best option.
Nearly 51,000 households pulling down over $100,000 have entered the renter pool in Greater Boston since 2009, a disproportionate number landing in Boston and Cambridge, CoStar noted, citing U.S. Census Bureau stats. That’s compared to just 9,000 earning less than $50,000.
As Millennials age, that pool of highly paid renters will begin to shrink, but the full effects won’t be felt until 2023.
Don’t Expect Crash, Even in Recession
All that said, there’s one wild card that could have a significant impact on the luxury apartment market, and that’s the possibility of a recession.
Economists are chattering about the possibility of a downturn in late 2020 or early 2021.
While that could push luxury rents down a bit, barring another Great Recession, the high-end rental market won’t be collapsing, as some fear.
Scott Van Voorhis
CoStar’s Conway sees a single percentage drop in luxury market rents from a mild recession.
We’ll see. That wouldn’t be such a bad thing and frankly, a 4 or 5 percent drop in rents would be more than welcome.
But it’s a far cry from the luxury market implosion some have been predicting for years now and which just doesn’t seem to be in the cards, however you shuffle them.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
