Boston's Bustling Multifamily Market

May 10, 2023

Greater Boston is home to over 118 colleges and 346,000 students, making it the city with the fourth-highest concentration of colleges in the United States. Universities, healthcare, and finance drive the metro's economy, but additional housing is desperately needed. The metro is undersupplied by 77,000 units, leading investors to redevelop office space, factory buildings, and more into residential space.

President of Land and Sea Real Estate, Demetrius Spaneas, CCIM, an expert in commercial development and investment sales in Boston, shares his thoughts on the current market.

Economic Drivers

Boston is home to many prestigious schools that draw international talent and support the region's continual innovation. According to the St. Louis Fed, GDP grew 56% in the MSA from 2011 to 2021. However, the city's renowned healthcare and life sciences industry is the main attraction for students and companies—home to 25 hospitals, 120 Health IT and Digital Health companies, and over 12,000 jobs in life sciences. Recently Greater Boston became the number one Biotech hub in the world, headquartering over 1,000 biotechnology companies. With big pharma and university backing, the market is exceptionally resilient, maintaining demand from national and international investors and tenants.

Strategy Pivot

Constricted capital markets, sellers unwilling to budge on price, and the recent bank runs have caused investors to take a step back from commercial assets. But according to Spaneas, the more ambitious investors are exploring new strategies to capitalize on Boston's resilience.

Like other major metros, the office market has taken a direct hit; vacancy rates have doubled since 2019, currently over 12%. Class B assets have taken most of the punishment as the flight to quality continues. However, as many current office landlords are looking to exit the asset class altogether, an opportunity is presented to multifamily and student housing investors. As mentioned, the housing market is exceptionally under-supplied and maintains an ever-increasing demand for student housing. As a result, investors are beginning to explore redevelopment deals, converting office space into residential. The redevelopment of office space provides a more attractive route than ground-up because of the high construction costs. Boston is ranked as one of the top five most expensive cities for construction. Spaneas states you are pushing $300/sf for multifamily development. On the other side of the coin, average effective rents had a 16% YOY increase since Q4 of 2021. According to RentCafe, the average asking rent is $3,894. Even with the extremely high rents, the market maintains an overall occupancy of 96%.

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Multifamily Securitized Cap Rate - Boston MSA Powered by Rockval™ and Trepp®

Securitized cap rates for the MSA bottomed during the peak of the multifamily market in late 2021 but have formed a steady uptrend with the pressure from capital markets. As of Q4 2022, the median securitized cap rate was 4.75%. The city with the lowest securitized cap rate was Charlestown, MA.

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Multifamily Securitized Cap Rates by City- Boston MSA Data Range: January 2022 - March 2023 Powered by Rockval™ and Trepp®

Another redevelopment project gaining traction is converting office space into Bio-lab Space. The current demand for bio lab and life science space in the Boston-Cambridge market is inextinguishable. Bio-lab space rents are over $100/sf and trade in the $1,700 -$1,800/sf range. Construction costs for bio-lab are usually between $700 - $800/sf, but in more demanding markets like Cambridge, they can exceed $1,000/sf.

In INRIX's 2022 Global Traffic scorecard, Boston was ranked 2nd in the United States and 4th globally for the city with the worst traffic. The subway and commuter rail is expanding throughout the suburbs to combat traffic. Recent legislation has incentivized multifamily development in commuter cities. If you are developing within a half mile of a bus or train station, you are automatically qualified to build 15 units per acre. Lowell is an example of a commuter town that has exploded with the recent legislation changes.

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Data Range: January 2022 - March 2023 Powered by Rockval™ and Trepp®

Utilizing data from Trepp®, we can visualize the securitized loan-to-value of multifamily assets in the Boston-Cambridge-Newton MSA on a county level. The capital markets consider Norfolk and Rockingham counties less risky than a county like Strafford, willing to loan 14% more capital on multifamily assets

Re:Cap Key Takeaway

Boston is one of America's oldest cities, riddled with history and innovation. As the economy continues to grow here, so will the demand for housing. Although the construction costs are high, it is easily offset by elevated rent prices and continued growth. Rent collection is also very resilient, as parents pay for most student housing. Overall, it is a stable and growing market that provides a lot of redevelopment opportunities with a huge payoff.

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