If You Build It, They Will Come: Demand Exists for More Multifamily Housing in Greater Boston

A recent article in The Boston Globe talked of the recent surge in apartment construction, identifying 11 developments either under construction or about to receive final approvals. Although not as many, there are also large multifamily projects underway in the suburbs, including John M. Corcoran’s development in SouthField (the former Weymouth Naval Air Base) that Rick High described at NAIOP’s recent lunch program.

Some skeptics believe that the weak economy and high supply will result in an oversupply of multifamily housing. I disagree. There is no doubt we have room in the market for quite a few more projects, both in Boston and the surrounding communities.

Since the recession began in 2009, the vacancy rates for rental housing have plummeted and, not surprisingly,  the rents have pushed upwards.  Boston now has one of the lowest vacancy rates in the country. With higher rents and interest rates remaining historically low, new multifamily developments are finally viable.  Though the costs of housing production in Massachusetts are still among the highest in the nation, due in part to labor costs, these projects are profitable (by some rather thin margins, though.)

If you believe the increased demand is only due to the burst of the single family housing bubble and the resulting foreclosures, you need only look at the other drivers in this area. The research firm REIS has reported that the net absorption in this market is the highest on record since it started tracking the data in 1980!

As reported by Cushman & Wakefield, there are a number of factors contributing to the growth of the rental housing market in the Boston area:

  •  Job Growth: With a conservative 35,000 jobs a year projected to be created, there will be an additional 35,000 households over the next 5 years;
  • Change of Ownership: 87,000 rental households are needed to fulfill the demand created by the shift in ownership from single family to rental;
  • Increase of Echo Boomers (ages 21-34): 27,000 rental units are needed to satisfy the demand created by this generation. Approximately 75% of this population are renters and this demographic is expected to grow by 2.2% over 5 years.

Bottom line – that’s a lot of demand!  And even with all of the construction planned, the vacancy rate is still projected to drop.  Certainly good news for developers and the Massachusetts economy!

Demography is Destiny for Multifamily Housing

This was the mantra shared by Dr. Barry Bluestone, founding Dean of Northeastern University’s School of Public Policy & Urban Affairs, at today’s NAIOP program, The Future of MultifamilyHow Demographics Are Driving Development. Barry started off the program with a great presentation on the impact changing demographics are expected to have on Greater Boston’s housing market.  Given the national depression in home prices, it was surprising to see that our local apartment rents continued to rise after 2005 and, even with some adjustment due to the recession, today they are only 2% lower than their 2008 peak.  This is due in large part to vacancy rates that have remained stable at 6%.

Our rental housing market has remained strong for a number of reasons including: foreclosed homeowners reverting to rental housing; young families holding out for further drops in housing prices or being unable to make the necessary down payment due to new lending criteria; and increased student demand.

On the last point, due to the Boston area’s abundance of colleges & universities, the student population has increased by nearly 24,000 undergraduates and 22,000 graduate students since 2000.  And although the schools house over 100,000 undergraduates, nearly 180,000 live off campus. With graduate students, only 8% of them live on campus.

Bluestone was convinced that there are real opportunities for the private sector to provide the needed housing for both undergraduates and graduate students.  New housing alternatives for graduate students could include the creation of Multi-University Graduate Student Villages to help take pressure off the urban rental market and help retain young professionals in the city.

At the opposite end of the spectrum, Massachusetts is aging rapidly, with the Baby Boomers projected to represent higher percentages of the population over the next decade. There will be some great opportunities for multi-family housing during the next decades, with some empty nesters looking for smaller, easier to maintain housing, and others choosing to “age in place” in suburban, smaller units, while still others may look to more urban environments with more amenities provided by city life.

The panel that followed Dr. Bluestone included Larry Curtis, President, WinnDevelopment; Wendy Nowokunski, President, The Northbridge Companies; and Doug Straus, SVP, Director Residential Development, National Development.

Some key take-aways included:

  • For market rate housing, transit-oriented multi-family is highly marketable.
  • Be it subsidized, market, or senior housing, higher quality finishes are now expected as the norm.
  • Senior housing is not your “grandfather’s” housing – it is now varied in service delivery, including independent, assisted living, and memory care residences (diminished cognitive capabilities affects more that 40% of those over 85 living in senior housing.)
  • Even with state and federal subsidies, new construction is very difficult, leading to more interest from investors in repositioning older properties.
  • Green is becoming an expectation, but there is no clear standard as owners market their properties as green.  Some owners are focusing on very visible improvements (solar), while not pursuing the more energy saving upgrades.

It appears that the current strong attraction for rental housing in the investment markets is well founded and the prognosis for the future of this product type is a clearly bullish one.