315 on A apartments

Think office tower prices have gone bonkers? Just look at some of the insane numbers new luxury apartment towers in Boston and Cambridge are fetching.

Luxury units are flooding the downtown Boston market right now, with a new apartment tower seemingly on every corner. But investors, far from worried about a bubble, are shelling out unprecedented numbers to snap up these posh rental high-rises and towers and add them to their portfolios.

Deals for apartment towers and buildings across the Boston area are on track to top $4 billion by the end of the year, blowing away the high-water mark set back in 2007, according to Travis D’Amato, a senior vice president at JLL in the multifamily sales group.

Soaring rents and rock-bottom interest rates are helping stoke the frenzied deal-making.

And the amount of money spent per apartment is soaring as well, with prices climbing into the $500,000s and $600,000s, almost double what was being spent just a few years ago.

There is even talk of a deal for one deluxe downtown building in which the units are expected to sell for north of $1 million each, which would certainly be an eye-popping number.

“We are at an historic pace,” JLL’s D’Amato said. “Almost every urban deal is north of $500,000,” he added of the soaring price per unit.

Record Deals

So far this year, there have been $1.7 billion in sales of various apartment projects and towers. That beats out last year’s $1.4 billion and matches the previous high water mark, also $1.7 billion, in 2007, D’Amato said.

Given all the properties on the market or about to close, we could be looking at another nearly $3 billion in deals before the end of the year, potentially pushing the total to $4.5 billion.

All told, there have been 44 major multifamily deals so far this year in the Boston metro market, which includes everything inside I-495, Southern New Hampshire and parts of Rhode Island as well, according to D’Amato. That’s compared to 34 deals in all of 2014.

Fetching these golden numbers are posh new addresses, like the new Twenty/20 tower in Cambridge’s budding North Point neighborhood and the Seaport’s 315 on A, among others.

Twenty/20 NorthPoint is on track to fetch more than $200 million, or more than half a million dollars for each apartment.

The 20-story tower, built by former City Hall development chief Tom O’Brien’s HYM Investments, features 335 apartments, including 41 subsidized units rented out at below market rates. Close to the Green and Orange lines, the new tower features amenities like a basketball half-court called Hoops and a bicycle garage.

Over in Fort Point, 315 on A weighs in at a hefty $640,000 per door after Equity Residential’s $130-million deal for the 202-unit luxury living complex. Meanwhile, Charlestown’s Gatehouse 75 sold for more than $54 million in March. That’s $550,000 for each of its 99 units.

These are prices significantly above the last high-water marks.

The sale of Park Lane Seaport, twin towers on the waterfront, looked like quite a rich deal when the project sold for $193 million back in 2010. Yet at $416,000 per unit, it would hardly turn heads now.

However, if a blockbuster deal for the Arlington goes through, it could make even make the $500,000 and $600,000 per apartment deals looked conservative.

The renovated 1920s Renaissance Revival building, overlooking Park Square with some of Boston’s most expensive apartments, is on track to sell for $132 million.

That would place the value of each apartment in the 14-story high-rise at a phenomenal $1 million.

Sloughing Off Bubble Fears

While the numbers may seem stunning, what’s happening here isn’t all that big a mystery. Rents are on a roll and developers and investors are scrambling to jump on the luxury apartment gravy train.

Apartment rents have jumped by roughly 25 percent since the Great Recession, with rents on cramped studios equal to what tenants were paying for one- or two-bedroom apartments a few years ago.

And, surprise, surprise, the rental high-rises fetching the big dollars from investors are the ones where it costs the most to live. The Arlington, for example, is one of the most expensive places to live in the city, with rents at a loft $6 a square foot. Rents start at $3,200 and go up from there.

Still, why pump big dollars into a luxury apartment market that increasingly seems like it is on the road to overbuilding?

Amazingly or not, real estate investors are betting big on a dangerous but predictable assumption, the old “this time it’s different.”

That said, the numbers may not be quite as crazy as they seem.

For one, the pension funds, real estate investment trusts and other investors snapping up luxury rental addresses at record prices are playing it safe when it comes to debt.

Fearful of overleveraging, most deals now are topping out at 50 percent debt, with 65 to 70 percent at most, D’Amato said.

That gives the prospective owners of Cambridge’s Twenty/20 or the Arlington in Boston some wiggle room should the economy stumble and the rental market takes a hit.

Moreover, the Boston area, after years of anemic rental construction, is still starved for apartments, even with all the construction taking place.

Of course, we won’t know whether all these assumptions were hopelessly overoptimistic or right on target until the rubber hits the road and the next downturn hits, as it eventually must.

“Now you have much lower leverage and enough deep pockets that a drop of 10 percent isn’t going to hurt,” D’Amato said. “Something catastrophic would have to happen for a 30 percent loss in building value.”

Unfortunately, “something catastrophic” often happens more often than we would like or expect. Given recent American history, this is not a completely reassuring line.

As 2001 and 2008 both showed, catastrophic events typically strike when no one is looking and, while unusual, they happen with more regularity maybe than we give them credit for.

Here’s hoping the luxury apartment tower market has at least a few more years before it faces a real stress test, catastrophic or not.