Are Multifamily's Boom Days Over?
For the first time, multifamily development has surpassed single-family homes statewide, yet luxury developers are giving free rent concessions. But that doesn't mean the heady days are over, according to expert panelists at our fifth State of the Boston Market event yesterday.
Over the next five years, 37,000 new multifamily units will get into development around the state, says Mass Save Residential New Construction's Kristin Simmons, who with colleagues provides financial incentives to developers like Millennium Partners, New Boston Fund, and Wood Partners to increase energy efficiency. Even towns like Chicopee and Springfield have shifted focus from single family. And if buildings don’t have amenities like a pet washing station, gym, and theater, they’re not in the game.
Condos are coming back because people sick of commuting want easy access to downtown, says The Collaborative Cos CEO Sue Hawkes. For developers, the value play is in the inner-ring communities—Somerville, Charlestown, and East Boston. In downtown Boston, the luxury market is topping $2,000/SF, and rents have hit $5/SF. In secondary and tertiary markets, prices are lower for consumers and towns less demanding for developers, she says. In East Cambridge, rents have gotten almost as high as downtown, and sale prices of $700/SF are double what they were just a few years ago. The multifamily market has running room perhaps until 2018, she estimates.
The good times in multifamily will last as long as there’s low-cost capital for fuel, says DSF Group prez Josh Solomon. Demographics are in the rental apartment developers’ favor, especially considering how difficult it is to get a mortgage on for-sale residences. DSF likes communities close to, but not in, downtown Boston. The differential in rents between the city and suburbs—the largest he’s ever seen—favors markets such as Tewksbury, Watertown, and Medford if the housing is high quality, well amenitized, has transit access, and is appropriately wired to attract Millennials.
Reining in costs and coming to market faster are always issues in development, and Samuels has been buying out its construction contracts with only design development drawings, says principal Leslie Cohen (right, with Goulston & Storrs director Amy Moody McGrath, who moderated and was an event sponsor). This saved six months on the construction of Barry’s Corner mixed-use development in Allston adjacent to Harvard Business School.
A sign that the multifamily market has its limits are the concessions being offered by developers of some new luxury buildings—one to three months free rent, says Hamilton Co CEO Harold Brown. Cap rates are likely to keep falling, even into 3% territory, because buyers are so eager to get into the Boston market that they “don’t care if they make money," he says. Micro-units sound good, but when there’s a downturn, who wants to pay for an apartment that has the bathroom in the kitchen? He’s glad that some developers are building projects without parking. Why? All of his buildings have parking.
Still in the multifamily game but cautious is Northwestern Mutual, says its real estate investments director Peter Jahn, whom we snapped post-event with colleague Nicolas Jahnke. On the debt side, the delta between rents and total development cost is getting very tight. On the equity side, it’s becoming difficult to get deals to pencil out, especially for high-rises in the city where labor costs are high. When Northwestern invests or lends, it looks for properties that have access to transportation and a live/work/play environment. When the downturn comes, they’ll maintain their occupancy, he says.
In a 400-year-old city like ours, there’s a lot going on underground and behind the walls—and Feldman Land Surveyors is helping developers get a clear picture of what to expect, says VP Paul Foley and prez Michael Feldman, who also sponsored our event. The company is working on the new Element Hotel that’s under construction in Southie near the Convention Center; the renovation of the Atrium mall in Chestnut Hill; and Simon’s $500M expansion of Copley Place over the Pike. A big thank you to some of our other sponsors: Stewart Title, WiredScore, and NSTAR. Stay tuned for more coverage Tuesday.