Boston’s Pricing Power

The Colliers International team in Boston specializes in middle market multifamily sales in the Greater Boston market, and it’s the responsibility of Bruce Lusa, vice president of the company’s Boston’s multifamily investment sales team, to advise all owner and developer clients on how to best maximize asset value.

A seasoned 17-year veteran in the industry, Lusa has been responsible for sale and lease transactions valued at more than $2.6 billion and totaling more than 12 million square feet.

The Colliers’ team works across the spectrum in terms of property types and investment profiles (stabilized, value-add, development), including garden style and mid-rise apartments, land and development sites, condominium projects and affordable, student and senior housing.

With the first few months of 2018 behind us, what are the trends you’ve observed in Boston’s multifamily market?

Lusa: So far in 2018, we’ve really seen Boston’s building boom continue, with no real signs of slowing down. The under-$1.5 million condo market is very strong, and interest rate increases by the federal government have been absorbed in stride. Transaction volumes are down from last year and fewer high watermarks are being hit, but strong pricing persists. Lastly, international capital investment—particularly Chinese investors—are very active, and they are driving the market in Boston, especially when it comes to recently built, core quality assets.

What’s happening in the sectors you follow?

Lusa: We particularly focus on middle-market multifamily housing, meaning transactions under $50 million primarily inside Route 128 in the Boston market. This segment of the market is performing very well with abundant liquidity (of equity and debt) chasing deals, strong property fundamentals and a vibrant regional economy underpinned by an enviable trio of growth industries—tech, healthcare and education. When a middle-market deal is marketed and priced appropriately in today’s market, the competition is as fierce as ever.

What’s on your radar close to home?

Lusa: Amazon’s HQ2 decision and the implication of the $5 billion investment and 50,000 jobs, as well as the Boston Planning and Development Agency’s (BPDA) willingness to grant more height/density than imaginable in the past. The BPDA has seemingly opened the spigot, and this is resulting in both the creation of more (and much-needed) affordable housing in the city, enabling property owners to capitalize on historic land valuations.

Big picture, we’re keeping an eye on the anticipated interest rate increases this year and the effects of the tax cuts and jobs bill. It will be interesting to see the implications of each, and if there will be any counterbalance between them that sustains the cycle.

What do you feel is the most important thing that investors need to be aware of in today’s multifamily environment?

Lusa: Despite the drop-off in sales volume last year—after a record 2016—there is enormous liquidity and demand for multifamily investment properties in this marketplace. New supply presents its challenges, but multifamily remains a smart play as population growth continues and trends such as urbanization, falling homeownership rates, empty nesting, later marriage and lower birth rates create long-term unique structural advantages for multifamily investments. Occupancy rates are near historic highs, and while we expect rent growth to slow, we believe market conditions will remain fundamentally sound. It’s still a great time to take advantage of the capital markets and sell at top-of-market pricing, or finance at attractive long-term rates.

What’s your biggest piece of advice with today’s current market?

Lusa: Taking the long view, we believe the market still has room to run and the fundamentals will hold up versus other investment options. Right now, with rent growth leveling off, we are advising and helping our clients to aggressively manage operations and expenses to keep net operating incomes and values growing.

Anything surprising happening so far in 2018?

Lusa: What’s been surprising is the muted impact of interest rate increases over the past 12 months. The impact of the three quarter-point rate increases in 2017 was largely absorbed by tightening spreads among lenders, which effectively kept the all-in rates for borrowers the same. As for the three anticipated increases in 2018, we’ll have to see how things play out this year, but overall, we anticipate the multifamily sector to have another solid year.