The emergence of national players such as AvalonBay Communities on the local scene has increased the supply of apartment space. AvalonBay has undertaken projects in communities such as Peabody, Wilmington and Marlborough, where the Avalon Orchards development (above) was recently completed.
It has been the center of development and investment interest for commercial real estate in 2002, but some are beginning to wonder whether multifamily is multiplying too much, with a slew of apartment projects continuing unabated despite the extended economic downturn.
“Right now, the demand is probably not there for some of these [multifamily] sites,” Nordblom Co. Vice President Jonathan Close acknowledged last week. “The market has definitely softened.”
Economist Gleb Nechayev of Torto Wheaton Research said multifamily construction has remained active nationally, with total construction starts or permits issued well above 300,000 units this year, even as the negative effects of the recession have become more pronounced in recent months. While supply has trended down slightly, Nechayev said the decline has not been nearly enough to reflect the demise in jobs, and therefore, likely demand by potential renters. In the 1990-1991 recession, Nechayev said the number of multihousing units started shrunk by more than half in response to the demand deterioration. The reaction to the current slowdown has been far more muted, said Nechayev.
“If this trend continues with no substantial improvement in demand, then there must be repercussions for rent growth and vacancies and other measures of the health of this market,” he said. “If you don’t have new job growth and still have these levels of construction, something eventually has to [give].”
Interestingly, the lower interest rates currently in place nationally appear to be having a double drag on multifamily fundamentals. Not only is development of new units heavier because of the lower cost of capital, Nechayev indicated that many renters have been using the lower rates to make their first home purchase. One Torto Wheaton study revealed that the propensity to rent has fallen steadily over the last decade in lock step with the decline in the average 30-year mortgage rate. In 1990, for example, there was a nearly 37 percent inclination to rent, while the average 30-year mortgage rate stood at just about 10 percent. Today, with the average mortgage rate close to 6.5 percent, the propensity to rent has dropped to 31 percent. About three-quarters of the multifamily housing starts nationally are for apartments, said Nechayev, with the remainder being condominiums.
Lengthy Process
Locally, Nechayev said Massachusetts is also seeing a greater amount of multifamily construction than normal. Through midyear, the annual rate of new starts was tracking between 4,500 and 5,000 units, Nechayev estimated. And while that pace has slowed a bit since the summer, Nechayev said it will nonetheless remain above average for the year. On the employment front, Torto Wheaton is projecting that Massachusetts will continue to lose jobs through the end of 2002, with that trend unlikely to stabilize before the first quarter of 2003.
One reason construction has not slowed in recognition of the weak economy is the length of time it takes to get a project permitted, said Nechayev, a notion seconded by Close, whose firm is a leading player in the sale of multifamily assets. In Norwood, for example, Abbott Development is just coming out of the ground with its Norwood Crossing apartments after a lengthy approval process, while the Reserve at Marina Bay in Quincy was also delayed from its construction launch. In Boston, officials have yet to give the go-ahead to development of Hayward Place, a city owned parcel put out to bid more than a year ago.
Lincoln Property Co. and Equity Residential have proposed a luxury apartment building at Hayward Place, but have been stymied by extended foot-dragging. Indeed, even if approvals were granted immediately, the Boston permitting process would likely mean at least another year before that complex broke ground, one Lincoln Property official estimated.
One reason for the increased supply has been the advent of national players onto the Boston scene in recent years, including JPI Properties, Charles E. Smith Residential and AvalonBay Communities. The latter group has been particularly active, with new projects undertaken in such communities as Peabody, Wilmington and Marlborough. As Nechayev noted, AvalonBay has typically had a long lead time in getting its projects permitted, with some ventures taking as much as four years to get through the process.
Calls to AvalonBay officials were not returned, but the company has previously acknowledged a slippage of occupancy levels over the past year. But while demand has tailed off substantially, Close insisted there is no reason to become alarmed, insisting that Boston’s traditionally low level of apartment facilities will make up for any recent spurt of construction.
“We’ve never had a glut (of multifamily housing stock) in Massachusetts, and we clearly do not have one right now,” he said. “Once demand picks up again, we are going to need the inventory even more.”
Sporting one of the nation’s oldest apartment stocks, Close said Massachusetts has a long way to go to replenish outmoded properties, adding that is one reason investors have continued to flock to that market. Nordblom Co. has been more active in marketing apartment assets in 2002 than ever before, Close said, while the region has seen some significant properties change hands.
Leading the pack was the landmark sale of the Flatley apartment portfolio, a deal that reached $500 million. A New York real estate investment trust scooped up the 696-unit Gardencrest apartment complex in Waltham, while Teachers Insurance and Annuity Association is reportedly paying $290,000 per unit for the 273-unit Longwood Towers in Brookline. “We’re going to have a great year,” said Close, predicting there will be other high-level apartment sales in the next few months.
