Multifamily: Boom On
Boston has the perfect ingredients for a multifamily boom cocktail: shortage of apartments, rising tide of renters, and surplus of investors. (Add whiskey, vermouth, and taller buildings and you've made a Manhattan.)
At Bisnow’s 4th annual Multifamily Summit on Thursday, state secretary of housing and economic development Greg Bialecki told our crowd of 500 that the state is doing its part. Despite some municipalities' preference to stay the same, Massachusetts and metro Boston are growing faster than the US. Greg’s department is: identifying promising locations for further expansion; trying to create prompt, predictable permitting; and investing in infrastructure modernization after “decades of under-investment.” With 7,500 multifamily units produced in ’13, there’s lots of room to ramp up construction, he says.
The first of two blockbuster panels included Greystar senior director Doug Root, Centerline Capital Group managing director Paul Donahue, Oaktree Development founding partner Art Klipfel, ARA director Jennifer Athas, ADD Inc principal James Gray, JLL SVP Travis D’Amato, and Bingham McCutchen partner Richard Toelke (also an event sponsor).
As a buyer, Doug (of Greystar) sees deal opportunities ahead, as the regional economy remains solid, and demographic shifts favor rentals; young workers have scant savings and empty nesters are eager to unleash from home maintenance. (Water heater repair is a young man's game. Speaking of which, new video game idea: Grand Theft Water.) During this multifamily boom in Boston, there are plenty of merchant builders, and they’ll be going to market to keep investors like Doug busy. But he doesn’t expect the 8% rent growth he saw in early cycle deals; to compensate, Greystar is focused on finding assets they can renovate to run more efficiently.
While private investors may hold onto multifamily buildings, institutional investors are more likely to sell as the cycle matures, Paul says. On the other hand, when entities like JP Morgan buy major buildings, it’s often for cash. This phenomenon makes a lender like Paul “cry copious tears” but he’s assuaged by the absence of a new condo pipeline. Despite the Fed’s tapering, he says the 10-year bond market isn’t moving up anytime soon.
Art is an architect/developer whose firm has created a type of modular construction, the patented Greenstaxx system. There isn’t a huge investor market for modular yet, but Oaktree has been working with Federal and Greystar. An advantage: faster design and construction saves money on development and reduces disruption in the community. To control prices, Oaktree has sited projects farther from Boston: Chelsea, Reading, and West Concord. Since many renters are empty nesters or young professionals without children, more towns are seeing the advantage of having them live downtown.
Boston metro had nearly 4,000 new apartments delivered in ’13, compared to 10,000 in DC, 4,200 in Portland, and 8,000 in Seattle, Jennifer tells us. In the ‘burbs, much of the action was south of Boston; in the last cycle, it was north; and in the next cycle, it's likely to be west, she says. In suburbs, multifamily developers can employ 40B, the state law that allows them to bypass some local permitting if they include a percentage of affordable units.
With so much capital chasing Boston-area properties, and not enough for- sale buildings to go around, some investors like Clarion Partners and AEW are building their own developments, Travis tells us. He’s unfazed by the prospect of overbuilding multifamily because of job growth and millions of square feet of offices under construction in Kendall Square and the Seaport that will bring in several thousand workers. (New offices are nice, but nobody wants to sleep there.) The days when Boston’s high cost of living, lack of urban housing and amenities, opened the brain drain floodgates are long gone. ’13 was a great year; Travis expects a replay in ’14.
First hand evidence of investors going to second-tier markets like Seattle and South Florida: the ADDInc Miami office has grown from 25 people to 70 recently, says James. His architecture and design firm is making apartments more affordable by creating smaller units, in stick-built structures, on infill sites. But, he says, the firm still faces the challenge of inventing different kinds of housing so fewer people are priced out of the market.