CoStar Market Insights: Boston Apartment Construction Cresting in ’18

Unless you have been living in a cave the past few years, it is impossible not to notice the tremendous amount of apartment supply hitting Boston.

Due to better than average fundamentals, Boston was one of the first metro areas out of the post-recession supply gate in 2012. New completions grew each year, quickly reached an all-time high in 2014, and then immediately outpaced that by a large margin in 2015.

The next two years fell somewhere in between 2014-15, but 2018 will set a new high with 8,500 units coming to the market, or annual growth of 5%. To put this in perspective, this is more supply than metro Boston completed during the entire decade of the 90’s. In fact, one would likely have to go back to the 1920’s to find supply growth like the one we are seeing today.

From 1982 to 2011, inventory growth in Boston averaged 1.3% annually – about 40 basis points below the U.S. average – but from 2011 to today that number has jumped from 3%, or 120 basis points, above the U.S. average. This puts Boston in company with metros like San Antonio, Charlotte and Orlando, places people, unlike NIMBY Boston, normally associate with lots of building.

So what happened to cause all this supply? Like most trends, it was a combination of factors. First was the fantastic population growth of people aged 20-34, the age group most likely to rent an apartment. You may know these people by the term “millennials”.

In metro Boston, the number of people aged 20-34 was in decline from the late 1980’s into the 2000’s, but from 2004 to 2008 growth in this age group went from negative 2% to positive 2%, as over that period the metro added 30,000 people in that age range. As one could imagine, adding that many people in their prime renting years, plus another 130,000 since 2008, has kept the demand for apartments strong. Also, the post housing bust shutdown of single-family home construction in Boston and across the country pushed home prices in many areas to new highs and beyond the reach of many renters, which also contributed to increased apartment demand.

The other major trend leading to the multifamily supply boom was financing. The post-recession economy led to fairly weak office, retail and industrial fundamentals, and many banks at that time, and still now, are not willing to do any speculative projects.

Thanks though to agencies like Freddie Mac and Fannie Mae, the banks were still open for multifamily construction loans. And what do you do if you are an office, retail or industrial developer in a market where you cannot get financing to do what you do? You build apartments, and hence that is how we find ourselves looking at a new record year of supply in 2018.

The biggest project coming on line in 2018 is the 585-unit 345 Harrison, located across from the recently completed Ink Block mixed-use development in Boston’s South End. Fortunately for project developer UDR, a giant REIT based in Colorado, inventory growth in Boston, as in many metros, is projected to slow after 2018.

In fact, by 2020 CoStar Group projects that annual supply will drop to a little more than 2,000 units – close to the average number for annual deliveries in metro Boston since 1983. This rapid slowdown in construction is caused by a number of factors including a lack of new viable sites, a huge increase in construction costs with everyone in the industry using many of the same subcontractors, who as they got more business than they could handle the past few years have raised prices, and tapped out banks who are now in many cases full on multifamily construction loans, and that goes a long way to explaining the slowdown in development.

This will be welcome news to many multifamily owners, especially those of new buildings in the cities of Boston and Cambridge, which have been forced to offer an ever-increasing amount of concessions to attract and maintain tenants. Though it is bad news for tenants, coupled by the fact that the majority of new buildings were luxury apartment buildings, all the construction helped stem what would have been skyrocketing rents across cheaper apartments, and in a few submarkets was leading to minor declines in rent levels.

CoStar Market Insights is a new feature providing a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 206 metro areas, with a granular understanding of the projects, players and economic trends that move these markets. Learn how CoStar Market Analytics can add to your market knowledge, helping to minimize risk and maximize returns.

Source: CoStar Market Insights: Boston Apartment Construction Cresting in ’18