Inside Boston’s Multifamily Market with CBRE’s Simon Butler

Boston’s multifamily market is booming, but what are the three key aspects investors must take into account before deploying capital?
Simon Butler, Vice-Chairman & Partner at CBRE/New England

Simon Butler, Vice-Chairman & Partner at CBRE/New England

Boston—The Hub’s economy is going strong, fueled by the thriving technology sector. The addition of new jobs keeps demand for multifamily housing at healthy levels and increases the appeal of investors for this market. Simon Butler, vice-chairman & partner at CBRE/New England, talked to Multi-Housing News about the investment climate in Boston’s multifamily market and current trends in the industry.

MHN: This year, Boston was named the top city in the country for tech startups. How do you think this dynamic influences the multifamily sector in the city?

Simon Butler: Boston being named a top city for tech startups absolutely has a positive impact on the multifamily sector. The fact that the city is crawling with tech startups and innovation-based companies means we are experiencing significant job growth, coupled with inward migration. Simply put, when you combine job growth and inward migration, this leads to increased demand for multifamily product, and therefore strong occupancies and long rent growth. As a tech hub, Boston is a prime example of a growing economy where there is continued job formation with the recent move of General Electric’s corporate headquarters, the biggest endorsement to date. Overall, from a multifamily investor’s perspective, this trend is most definitely a positive for the sector.

MHN: What can you tell us about the U.S. multifamily market in terms of supply and demand?

Butler: Since I work in the Boston office, I can only speak to the market here, which is definitely booming both in the urban and suburban markets. With the strength of job formation in Boston, there is a good story to be told in terms of demand for multifamily housing. While there are some submarkets where new product is a bit over-supplied, which is a short-term phenomenon, overall Boston is experiencing strong demand.

Obviously, when you have a strong and dynamic economy, developers are likely to enter the market looking to build new assets which has been the case in Boston over the past couple of years. In my opinion, there has not been enough quality product built over the years when compared to other markets nationally and, to an extent, we are catching up. Additionally, when talking to developers today, you will commonly hear complaints about the lack of available sites. For example, in the suburbs, a number of communities are hitting their Chapter 40B counts, meaning communities are hitting capacity of affordable housing, which is putting a hard cap on supply. Also, in urban locations the economics on new developments are getting very tight.

MHN: Are luxury units still in demand?

Butler: Speaking locally, specifically in Greater Boston, there is absolutely still demand for luxury units. For example, people who are relocating to the market or baby boomers looking to experience the urban lifestyle again. It is ultimately still all about the individual submarkets and what drives them. In the suburban markets, people often care about accessibility to more affluent communities and strong school systems. This is important given the lack of affordability in the single-family market.

MHN: What are the key aspects that should be considered when it comes to multifamily investing?

Butler: First would be the location itself and its economic drivers. A successful multifamily investment must have an economic engine that drives the demand from perspective residents, as this will ultimately have a significant impact on the ability to drive rents long-term. Location is critical because residents base their decisions off of access to public transportation, local retail amenities and strength of surrounding schools.

Second, it is an understanding of the business plan and clearly defining objectives. For a Class A asset, an investor should understand what will impact an asset’s ability to drive rents over the hold period, how to differentiate that community from its competition and any proposed assets in the pipeline. Investors should clearly understand the expense side of the acquisition and where any risks may lie. On a value-add deal, it is critical to thoroughly understand where the asset will sit in the market post-renovation, and ensure clear understanding of the premiums that can be achieved. Another consideration that’s equally as important is what the costs are to achieve these premiums.

Third, quality product should be a new, cutting-edge Class A community, or a well-renovated Class B product with amenities. It is important to offer a product that successfully meets the needs of its residents and their income profile. The wrong product in the wrong location will not be successful. Keeping abreast of the latest amenities is critical as communities compete against new assets in their submarket to maintain market position.

MHN: Are value-add deals for Class B properties now more attractive for investors than Class A communities?

Butler: This is dependent on what investors are looking for and the perceived risk profile. On the value-add side, the widely held perspective is that this is the strongest part of the investment market given the expectation that there is the ability to generate stronger returns through the execution of value-add strategy. These come in many different forms such as management play, amenity upgrade, light renovation, deep renovation or any combination.

There has been deeper bidding on value-add assets coupled with financing, which is accretive and adds to the overall return. However, with Class A assets, investors are more dependent on pure market rent growth. It is up to the individual’s perspective as to where we are in the cycle in terms of how to underwrite that. We have experienced strong and deep bidding on truly unique Class A assets.

MHN: Many investors are changing focus from CRE to multifamily properties. Why do you think that is?

Butler: The consistency of cash flow and appreciation are key for multifamily. Those aspects are generally what investors are looking for, as well as attractive debt financing. If an investor is buying in Boston, they also want strong long-term growth prospects coupled with liquidity, which the multifamily sector has.

Banks are now more cautious when it comes to lending for multifamily construction. Why do you think this is? How does this influence the multifamily sector?

Construction lenders have been pulling back this year in Greater Boston as a result of new banking regulations and a number of them reaching capacity on the construction lending side of business. This makes it significantly harder to capitalize new developments. Ultimately, this will slow the new supply pipeline.

MHN: What are the most highly-coveted amenities in the multifamily sector? What are owners striving to offer residents?

Butler: While gyms and eat-in kitchens are still amenities to take note of, people of all ages are finding themselves smitten with the latest and hottest trends including dog washing stations, rooftop community gardens, outdoor fire pits, yoga and spin studios, fitness-on-demand studios and boxing studios. Real estate professionals have benefited from this, finding that across generations, people are interested in experiencing all that these amenities have to offer. These “next level” amenities are also used as a sales tool and fit into the larger amenity trend in urban areas.

MHN: What trends will define the multifamily market in the coming years?

Butler: Changing demographic and population patterns, economic drivers, construction standards and green assets are some of the many factors that will impact and define the multifamily space in the coming years. This has been clear as we have recently seen the emergence of micro units, new urban construction and as a result, new neighborhoods. It has been an exciting time to be in Boston’s multifamily industry as the city experiences a booming economy driven by diverse industries, with no signs of slowing down.

MHN: What is the main challenge in the multifamily sector now?

Butler: The biggest challenge for the sector right now is new supply. Therefore, we’re left to question what the impact will be from a near-term rent growth perspective. Where in the cycle are we in terms of rent growth? In Boston, I think we’re going to get “extra innings” due to its thriving economy and promise for continued job growth.

Image courtesy of CBRE