Over the past few years, the decline of the housing market and tightening consumer credit guidelines have made it increasingly difficult for homebuyers to qualify for financing. Additionally, due to the economic downturn, many would-be homeowners are continuing to rent. As the “renting generation” ages, their choice to rent rather than buy should positively affect local construction, real estate and lending companies.
Currently, Massachusetts brokers and commercial owners are reporting a strong rental market, bolstered by indications of healthy long-term market fundamentals like low interest rates, rising rents and low vacancy rates.
This environment, in addition to the discouraging reality of homeownership, has increased the demand for rental housing. The Boston Apartment Realtors Association predicts that more than 2,300 new rental units will be completed by 2014. From that figure, the North Shore is expected to see 128 units go up in 2012 and 288 units in 2013.
Judging from my work with clients, particularly those on the North Shore, apartment construction (and thus, the real estate market and the overall economy) is headed for continued positive performance. Windover, the developer and builder of the Burnham Apartments complex in Beverly, is an apt example of the strengthening rental market. Burnham Apartments is a 39,500 -square-foot, 38-unit, four-story residential apartment building located on the site of a former car dealership on Rantoul Street, less than a half mile from the Beverly train station. Within a month of completion, all 38 units were leased. Based upon this success, Windover is looking to move forward with similar projects in Beverly.
Lifestyle Trends
From what I can recall, there has not been a project of this size completed in the last several years. Burnham Apartments may also highlight coming market and lifestyle trends for the North Shore.
In my opinion, there is a strong correlation between the success of the project, which is known as a transit-oriented development (TOD), and its proximity to the Beverly train station.
TODs, complexes within walking distance of mass transit, have significantly out-performed other projects in the current rental marketplace and are now extending further outside the city. The popularity of TOD units may foreshadow increasing demand for apartments on the North Shore as those ready to move out of the city, but not yet ready to buy, migrate to the suburbs.
The success of Burnham Apartments is a positive indication of economic improvement in the construction sector, as well as exceptional demand for well-located, well-constructed apartments. Over the past few years we have seen capitalization rates increase from the lows observed between 2005 and 2008.
Additionally, multi-family properties have generally fared far better in the last six to 12 months than other asset classes. For institutional-quality apartments in top geographic areas (like Boston) cap rates have never been lower. Now, this trend is extending to smaller, non-institutional projects on the North Shore. As investors continue to show interest in stabilized, appropriately-priced multi-family properties, it will be telling to monitor similar projects and observe how those in the 30-to-40 year old demographic respond to market conditions in light of this changing environment.
Joseph G. Greenough is senior vice president of commercial lending at
Salem Five.
