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Inflation, Interest Rate Hikes Present New Risks For Boston’s Multifamily Market

Boston’s multifamily sector has remained healthy as inflation rises to its highest level in decades. But as recessionary alarm bells have grown louder this week, industry experts said the market faces some risks that shouldn’t be overlooked.

Cabot, Cabot & Forbes' Daniel Nagler, Senné's David Keiran, TA Realty's Lisa Strope, Hines' Sean Sacks and Greenberg Traurig's Danielle Gonzalez.

Rising interest rates are making new multifamily deals harder to close, and owners of downtown apartments worry that if they continue raising rents to keep up with inflation, cost-conscious tenants may flee for more affordable locations. 

“Inflation is running the highest it's been in 40 years … and then the question is, how long is that going to last? And how long can you push rent growth at that level?” Hines Managing Director Sean Sacks said Tuesday at Bisnow’s Boston Multifamily Summit. Global investment firm Hines owns three apartment buildings in Boston and five more in the surrounding area. 

New inflation data Friday showed prices climbed 8.6% over the last year, the sharpest increase since 1981. The Federal Reserve responded Wednesday by raising interest rates by 0.75%, the country’s largest rate hike since 1994. That followed last month’s 0.5% rate hike, and the adjustments have already begun to slow deal volume in the commercial real estate market.  

Boston’s affluence and job growth have some developers confident that they will be able to continue raising rents and keep their buildings profitable. The multifamily industry has historically been resilient during recessions, and the ability to adjust rents every year gives landlords more maneuverability than they have in the office or lab markets.

“When you think about the inflation that we're feeling here in this market today, that push from the renter base coming in and bringing those higher-paying jobs into assets will continue to be able to outpace inflation,” TA Realty Director of Research Lisa Strope said.

For markets like Boston that have large sectors of their economy consisting of recession-resistant industries, investors and developers aren't feeling the pressures that other markets may be facing. As the life sciences industry continues to boom and rents grow, experts said the multifamily market in the city and its suburbs may have a buffer.

Bozzuto Construction Co.’s Lauren Burrows, Cottonwood Group's Scott Russell, Noannet Group's Jordan Warshaw, Samuels & Associates' Jeremy Ouellette, Veitas Engineers' Jonathan Bayreuther, V10 Development's John Tocco and Jefferson Apartment Group's Sandi Silk.

“We have a lot of recession-proof employers," said Daniel Nagler, director of capital markets at Cabot, Cabot & Forbes, highlighting the region’s large academic and healthcare sectors.

CC&F is a Boston-based developer that has built over 60M SF throughout the U.S.

The cushion that job and rental growth provide may help those who already own property in the area, but for those looking to develop or acquire multifamily assets, the road might not be as smooth. With rising interest rates making it hard for developers to obtain loans for projects, less activity is expected to make it through the pipeline.

“The concern that we get is really just interest rates and cap rates and inflation … we're seeing some degradation in pricing due to this,” Sacks said.

Senné Chief Financial Officer David Keiran said he has experienced four downturns in his career and has always been hesitant when dealing with higher rates.

“I'm kind of skittish about cap rates and what happens when we see a rise in interest rates, or get pushed into a recession and things start going sideways,” Keiran said. “They go sideways very quickly, and it gets very ugly.”

The pricing equation around multifamily deals has changed dramatically over the last half-year, Strope said. Six months ago, she said it was common to buy an apartment property at a 4% capitalization rate, a relatively tight yield for a commercial real estate deal. 

“There's a lot of concern when we're looking at four caps, whereas six months ago that may have been sort of standard,” Strope said. 

The Community Builders' Ivey Bueno, LYF Architects' Ken Feyl, Stantec's Krista Bourque and NFP's Daniel Rodliff.

Downtown apartment owners are also concerned that a flight to the suburbs could accelerate as inflation continues to make urban markets like Boston and Cambridge more expensive. Some renters during the pandemic have gravitated toward cheaper Massachusetts markets and out-of-state markets like Raleigh, North Carolina, and Atlanta where the cost of living stays relatively low but they can maintain a higher income, experts said. 

“We're seeing a lot of people moving into the suburbs," Keiran said. "It's just one of the things we've been talking about, and a lot of institutional investors are looking to buy properties in the suburbs to take advantage of the lower bases and elevated rents. At some point, we're gonna see those rents approach a level where people just can't afford to rent anymore.”

Although dramatic changes in renter demand haven’t yet occurred, market insiders are still keeping their eyes on the potential trend.

“At this point, we haven't really seen a pullback in demand as a result of affordability but it's definitely a metric that we're watching very closely and especially in very expensive markets like Boston,” Strope said.