The 198,479-unit Boston metropolitan apartment market is growing ever tighter, following a brief period of moderation in the 2000s due to a construction boom. The business community had blamed the Boston area’s typically low vacancy—well below 3.0% in the late 1990s—on regulations that discouraged new supply—rent regulations in urban areas and exclusionary zoning in the suburbs. These were lifted by the end of rent regulations in Massachusetts and state law 40B, which allows multifamily developers to bypass local zoning. Following a rent surge in the late 1990s a supply surge occurred in the 2000s. That surge is resuming, but is struggling to match demand.
Reis reports a second quarter 2012 vacancy rate of 3.7% for Boston, down 10 basis points from the prior quarter and 70 from a year earlier. The year-end rate had been above 4.0% each year from 2002 to 2011, after having been below that level each year from 1992 to 2002. The vacancy rate has fallen at the same rate in both the Class A segment and the Class B/C segment over the past year, but the Class B/C segment has been consistently tighter. The second quarter vacancy rates were 4.4% for Class A properties and 3.1% for Class B/C.
“The Boston apartment market will remain in favor of landlords in the coming quarters, though, as new developments surface and rents reach peak levels, residents may seek more affordable living options,” Marcus & Millichap predicted in its third quarter report. This source predicts the vacancy rate will reach 3.5% by the end of 2012. Reis predicts the metrowide rate will fall to 3.3% by the end of 2012 before entering a period of slower decline, a pattern also expected for the Northeast Region average. The rate is expected to reach 3.1% at year-end 2016, still higher than the rock bottom rates of the late 1990s.
SUPPLY AND DEMAND
The vacancy rate decline is expected to be moderated by a second construction boom. The recession and financial crisis had shut down the development of all kinds of real estate, and new supply fell to just 536 units in 2011 after having averaged about 4,200 per year from 2005 to 2009. But developers broke ground on a large number of projects in 2011, and these will start to complete construction in large numbers in 2013. Although just 259 units completed construction in the first half of 2012, that left 4,263 units under construction, and another 1,452 units in planned projects have announced development schedules. While only 755 units are expected to complete construction in 2012, the average for 2013 and 2014 is more than 4,000.
While new supply has waxed and waned, net absorption has been consistently strong since 2005. The second quarter saw a total of 402 units absorbed, but fewer and fewer vacant units left demand is starting to become constrained. The vacancy inventory is expected to fall to just 6,650 units by the end of 2012, just over half the 12,500 units that were vacant at the end of 2009. Reis predicts net absorption will total just 1,988 for this year, the first year with net absorption below 2,000 units since 2004. During the 2013 to 2016 period, however, more new supply will accommodate a near equal amount of net absorption—about 4,000 units in 2013 and 2014 and around 2,500 units per year thereafter.
The mid-2000s apartment construction boom was matched by a boom in owner-occupied housing, including owner-occupied multifamily housing. While some condominium projects are moving forward, that segment of the housing market is much quieter at present. Just 20 condo units completed construction during the first half of 2012, leaving about 900 under construction, many in projects started before the housing bubble burst and subsequently stalled. Some of the stalled projects have restarted as the economy has recovered.
Following a spike before 2000 and decreases afterward, Boston’s rents have tended to post moderate annual gains interrupted by one year of moderate loss in 2009. In the second quarter of 2012 the average asking rent increased 1.0% to $1,796 per month and the average effective rent rose 1.2% to $1,717 per month, bringing the year-over-year gains to 2.4% asking and 3.1% effective. The Class A asking average for second quarter is $2,204 per month, up 1.1% for the period and 1.9% from a year earlier. The Class B/C asking average is up 0.9% over three months and 2.7% over twelve to $1,510 per month.
“By the close of 2012, rents will reach uncharted territory as owners boost asking rents 3.4% to $1,805 per month,” Marcus & Millichap predicts for 2012. “Effective rents will accelerate by 3.9 percent to $1,723 per month.” Soaring rents, according to this source, “has already ignited a building frenzy throughout Boston.” “New data from Rent Jungle, which tracks online apartment listings, found that average asking rents in Greater Boston increased 3.2% in June compared to a year ago,” according to the Boston Business Journal, but rent gains in central locations with transit access are running at 15.0% to 20.0%. “We were maybe negotiating a little last year,” a property manager told this source. “We’re not finding that at all now.”
Boston’s average effective rent as of second quarter is 66.4% higher than the U.S. average of $1,032 per month according to Reis; its household average income is just 24.5% above average according to Moody’s Economy.com. While Boston’s rents are high, however, its rent increases have tended to lag the U.S. and Northeast Region averages since 2000. Reis expects this to continue. Gains of 3.2% asking and 4.2% effective are forecast for 2012, following by an increase of just under 4.0% for 2013, but subsequent annual increases are forecast at just 3.0% to 3.5%.