Defined as one of the top U.S. markets, Boston has been historically positioned for growth. Given the strong intellectual capital and healthy economics, the metro continues to offer new opportunities. Nonetheless, as costs continue to rise, developers and investors are forced to change their strategies.
Soon, Boston’s housing market will no longer be defined by its core urban pockets as developers gravitate towards secondary locations to avoid high costs, according to Travis D’Amato, managing director of property sales in Walker & Dunlop’s Boston office. In the interview below, D’Amato provides insights into how investors and developers are shifting their approach in Boston’s multifamily market.
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How would you describe the current multifamily lending landscape in Boston?
D’Amato: There is an abundance of liquidity from every type of lender ranging from government-sponsored enterprises and life insurance companies to local, regional and national banks as well as debt funds.
What sets Boston apart from other East Coast markets?
D’Amato: Boston’s stable base of world-class medical and educational institutions. This base of employment grows steadily and produces a highly paid, highly educated workforce. This growing demand coupled with high barriers to entry on the development side gives Boston one of the best supply-demand dynamics in the country.
With the current pipeline lagging demand, what can you tell us about the outlook for multifamily development in Boston?
D’Amato: There is desire and capital availability to build multifamily product from the urban core to the far suburbs, even New Hampshire and Rhode Island. We will see developers gravitate towards secondary markets to build projects as costs in the urban core continue to rise. I believe most of the pipeline going forward will be stick-built suburban product.
Boston is one of the most expensive cities to live in across the U.S. How is the market’s affordability crisis impacting investment?
D’Amato: We are seeing investors buying in more “price-appropriate” markets. Meaning, instead of just buying in the urban core at top-of-the-market rents, they are willing to invest further and further out, into markets where the total dollar rents are lower. This benefits investors, because not only are they able to underwrite higher rent growth from a lower starting point, this lower-cost housing is likely more recession-resistant.
What is the most important aspect investors should consider when deploying capital in Boston?
D’Amato: They should review the risk-adjusted return versus other markets. Our cap rates may be slightly lower, but our risk-adjusted returns are expected to be the highest in the country over the next several years. Investors should also be very knowledgeable about the micro-location surrounding the deal they are considering investing in. There are some pockets of supply and every deal has its own risk profile.
What are the biggest challenges in the multifamily financing landscape today?
D’Amato: Lack of product. There is an overabundance of capital on the debt and equity side and not enough deals to satisfy demand.
How have the needs of Boston multifamily borrowers changed in the past three years? How do you anticipate this will change in the next three years, given the current economic outlook?
D’Amato: All borrowers want is a lower cost of debt and a higher loan-to-value. We are anticipating a sustained low interest rate environment in the near future.