Beantown Market Still Simmers

By Patrick J. Leblanc, Sperry Van Ness Comvest RealtyGreater Boston has historically been a strong rental market with limited supply, a youthful demographic in this popular college town and job-changing professionals who typically rent. But a strained economy reflecting national trends and local supply increases has changed market conditions.The Boston development pipeline remains strong, with projects conceived during the boom of 2005-2007 coming online in 2008 and 2009. Reis reports 4,429 rental units completed in 2007, and 1,555 rental units completed in the first half of 2008.In addition, Reis reports 2,633 condo units came online in 2007, with 450 more condos to date in 2008.Significant completions in the first half of 2008 are the 426-unit Archstone North Point, the 312-unit Archstone CambridgePark Phase 1 and the 310-unit West End Residences at Emerson Place.Local property managers managing Class B multifamily properties are reporting strong prospective tenant traffic with stories of couples who can’t afford to buy and prospective residents who are renting homes that are being foreclosed upon. For example, one well-managed property on the North Shore reports a 98 percent occupancy rate, strong foot traffic since spring and particularly strong traffic for the past several weeks.Economic driversWhile Massachusetts has seen an increase in unemployment rates, the greater Boston area has also seen an increase in employment, with increasing job growth in 2005, 2006 and 2007. Total non-farm employment in Massachusetts has been slowly increasing every month from November 2007 through June 2008, from 3,315.8 thousand to 3,335.4 thousand jobs. The Bureau of Labor Statistics reports that, as of June 2008, Massachusetts total nonagricultural employment was at 3,295.3 thousand jobs, an increase of 1.1 percent over the prior month, versus a national decrease of 0.5 percent for the same period. Massachusetts unemployment for June 2008 was 5.2 percent, an increase of 0.3 percent over the prior month. By comparison, the U.S. unemployment rate was 5.5 percent for June 2008.The greater Boston area economy is fairly diversified. Primary drivers are education, technology, biotechnology, health services, financial services and professional service sectors. Gains in biotechnology and health services have offset weaknesses in construction and retail. Build-out of the traditional hubs of Longwood and East Cambridge has companies looking to other areas of Boston and the suburbs for growth. The Boston Business Journal recently reported that Cambridge’s Vertex Pharmaceuticals signed a letter of intent to lease at least 500,000 square feet, with an option for 500,000 more at Boston’s Fan Pier.The education sector remains strong, with 35 colleges and universities in Boston. This sector has traditionally been recession-resistant, and several universities have major capital projects underway. On the other hand, the construction sector is off, with loss of Big Dig jobs and state infrastructure projects scaled back to pay for the Big Dig.Technology, professional and financial services sectors are holding their own, particularly with businesses that export services seeing gains due to the weak dollar. VacanciesReis, which defines greater Boston as the area inside the route 495 loop, reports that vacancy rates have increased to 6.1 percent in the second quarter of 2008 from 5.9 percent in the first quarter of this year. This is the highest vacancy rate that Reis has recorded for Boston. The Class A vacancy rate is 8.3 percent, with Class B and C vacancy rates averaging 4.5 percent. This vacancy rate is expected to increase slightly in 2009, when overall rates are predicted to peak. While these vacancy rates are higher than historical norms, they are more indicative of a balanced supply than a rental market in distress.In the Boston city submarket, Reis reports a vacancy rate of 3.6 percent, the lowest metro-wide, with an average asking rent of $1,489 monthly. The Central City/Back Bay/Beacon Hill submarket has a first quarter 2008 vacancy rate of 4.6 percent and an average asking rent of $2,530 per month, the highest of the nine Boston submarkets, according to Reis. The Residences at Battery Wharf (103 units) and the SoHa Lofts (86 units) were completed in the first quarter.The North Shore/Merrimack River Valley submarket has a first-quarter vacancy rate of 8.0 percent, highest among the submarkets, and an average asking rent of $1,351 per month, Reis reports. The South Shore/Route 128 South and South/Southeastern Suburban Boston submarkets are tied for second-highest, with a vacancy rate of 7.5 percent, according to Reis.Net absorption for 2007 was 3,450 units, with forecasts indicating absorption rates generally in the 2,000 to 3,000 range. Net absorption is roughly tracking with forecast completions, keeping vacancy rates slightly decreasing to relatively flat. Within the city of Boston, Mayor Menino has been pressuring the area’s 35 colleges and universities to build more dorms. Of the city’s 135,000 college students, 107,000 live in off-campus housing— 62,000 in the city and 45,000 in the suburbs. Therefore, many small apartment owners, who have traditionally rented to students, are closely watching the college /city negotiations. Rental incomeAfter the repeal of rent control, the city of Boston experienced higher-than-average rent increases in the late 1990s through 2000. These increases exceeded northeast and national averages. Since 2001, rent increases have trailed northeast and national averages. In fact, Boston has had below-average increases during this decade. As of June 30, 2008, Reis reports asking rents of $1,133 for a studio, $1,536 for a one-bedroom, $1,870 for a two-bedroom, and $2,426 for a three-bedroom. For the years 2007 through 2012, asking rent increases are forecast to be 2.1 percent, 4.2 percent, 3.2 percent, 2.7 percent, 2.9 percent and 2.7 percent, respectively.TransactionsConsistent with other markets, transaction activity has dropped off in 2008. Reis reported six transactions for Boston in the second quarter of 2008 and 11 transactions for the first quarter of 2008. That is a marked change from 2007, when Boston was averaging over 20 transactions per quarter. Real Capital Analytics (which includes Worcester; Providence, R.I.; southern New Hampshire; and Maine all as part of the greater Boston market) reports a cap rate of 5.9 percent over the past 12 months. Reis reports a 12-month average cap rate of 5.3 percent. While Reis reports a cap rate of 4.1 percent for the second quarter of 2008, it should be noted that this cap rate was calculated using only the six transactions that were reported. Real Capital Analytics reports that over the past 12 months, the institutional segment is buying, purchasing in 51 percent of the transactions and selling in only 16 percent of the transactions. Private out-of-state buyers are net sellers, buying 7 percent of the deals and selling 12 percent of the deals.ConstructionIn 2007, Reis reported that 4,253 units came online in the Boston metro area. Forecasts for 2008 and 2009 have multifamily completions at 3,283 and 2,835 units, respectively, while 2010 and 2011 forecasts are for 2,508 and 1,992 units. These numbers are well above the practically non-existent development in the late 1990s and reflect projects planned during the rapid appreciation in the early 2000s. While there are 3,426 condo units still under construction, recent announcements indicate that as the condo market has softened, developers are converting some projects underway to rentals and conceiving new projects as apartments, as in many other parts of the U.S. Massachusetts is encouraging communities and developers to build transit-oriented development projects. The state is helping cities and towns through grants, education and policies modifying zoning regulations to encourage development projects that increase density and leverage public transportable and higher-density development. These rules are being held out as a model for other states.Greater Boston’s housing marketThe S&P/Case-Shiller home pric
e index indicates that home prices in greater Boston peaked in September 2005 and have decreased 11.9 percent since. This peak was earlier than many other metros. For example, Las Vegas peaked in August 2006 and has declined 31.4 percent since its peak. The PMI Group predicts an 11.8 percent risk that the Boston single-family housing market will suffer a 20 percent decline from current prices. This compares favorably to Las Vegas and Naples, Fla. at 88.1 percent and 97.6 percent, respectively. After a dip in June related to a 90-day moratorium, foreclosures are up more than 22 percent over the previous 12-month period statewide with Nantucket, Dukes, Suffolk, Essex, Middlesex and Worcester counties hardest hit.The National Association of Realtors states that existing homes sales are off 22.2 percent from first-quarter 2008 versus first-quarter 2007.Greater Boston continues to provide strong multifamily opportunities to long-term investors, as evidenced by recent institutional activity. The Boston area’s real estate cycle often precedes other markets, earlier to decline, earlier to rebound. Short-term weaknesses in rental growth and vacancies reflect national trends. Patrick J. Leblanc is an advisor for Sperry Van Ness Comvest Realty, based in Northborough, Mass., specializing in multifamily.