After Boston Condo Boom, Developers Look To ‘Extend Runway’ As Sales Slump

The slowdown in home sales has come at an inopportune time for many Boston condo developers. 

Boston over the last several years saw a surge of high-end condo construction, with a series of new towers delivering hundreds of multimillion-dollar units. Those buildings have struggled to hit their initial sales targets due to the effects of rising interest rates, and this is forcing developers to take out loans to shore up their finances and try new sales strategies. 

But the market may soon turn in their favor: High interest rates have also reduced the inventory of existing condo owners looking to sell and have slowed most new construction, meaning new condo buildings will have less competition in the coming years. 

"There’s no question that every building that’s available now has missed their dates for performance," said The Collaborative Cos. Managing Director Sue Hawkes, a residential broker who manages sales for several of the city's new condo buildings. 

Hawkes said that absorption for new condo buildings has fallen nearly 50% in the last year as high interest rates have slowed sales.

"We had a tremendous surge in luxury products in the last four or five years in Boston," Hawkes said. "And certainly, as it mirrored the interest rate margin, the absorption of those buildings has taken a hit in the last 12 months. All of them."

The extended period in which interest rates have remained high has also led some developers to need new financing to pay off their previous debt because sales haven't met their initial expectations.

Last week, Cronin Development received a $240M loan for its 114-unit St. Regis Residences, Boston development in the Seaport from Cottonwood Group. The condo building began selling in 2019 and is 55% sold, according to Hawkes, who manages its sales.

The developer put 10 units up for a "limited inventory bid sale" in October in an effort to spur activity, and the units' minimum bid was 20% below recent comparable sales, the Boston Globe reported. Last week, all 10 units sold to cash buyers, but the prices weren't disclosed.

"You know that the pace of the absorption of the product has slowed as the market has slowed, and so the use of this [financing] is to extend the runway," said Jonathan Miller, CEO of Miller Samuel.

In June, Fortis Property Group took out an $85M bridge loan for its 168-unit The Parker development at 55 Lagrange St. The property delivered last year, and the loan was collateralized by the 102 residential units that were still up for sale.

Hawkes said that these inventory loans serve as a bridge for developers, as they have more relaxed terms and provide a buffer that developers can use as they wait for more units to sell.

"They pay off the initial expensive financing [and receive] a little bit lower interest, a little more patience or a little bit more favorable terms on this inventory loan," Hawkes said. "That's what happened with The Parker, and that's what's happening with St. Regis."

Within the last decade, more than 1,000 new condo units have been built, and since 2000, 50 major condo developments have opened in the city, according to a Nov. 1 report from the Boston Globe's Spotlight Team. A number of those have opened in the last five years, including The Noannet Group's Raffles Boston, Fortis Property Group's The Parker, Cronin Development's St. Regis Residences, Boston, and MP Boston's Winthrop Center.

Within the last year, sales have slowed drastically with some of the bigger towers seeing sales volumes only half of what was seen in prior years.

Cottonwood Group's EchelonSeaport, which began sales in 2016 and is 90% sold, has seen 23 units sold year-to-date, a drop from 45 last year, according to data The Collaborative Cos. shared with Bisnow on the buildings it manages. 

Raffles Boston, which started sales in 2021 and is 80% sold, has seen 14 sales year-to-date, down from 29 in 2022, according to TCC.

Carpenter & Co.'s One Dalton, which began in 2017 and is 90% sold, has seen six sales year-to-date and had 11 last year, according to TCC. 

Related Beal's The Quinn, which started in 2019 and is 75% sold, has seen 12 sales year-to-date, just more than half of the 21 sold last year, according to TCC. 

Millennium Partners principal Richard Baumert said the developer's 317-unit The Millennium Residences at Winthrop Center is "nearing commitments for 50%" of the units in the building. Baumert didn't disclose how many units were sold.

"Since our opening, the response has been tremendous, especially for the penthouse homes, of which more than half have been committed," Baumert said in an emailed statement. "We continue to see a strong interest in the lifestyle that The Millennium Residences at Winthrop Center represent – live/work flexibility, industry-leading design, and amenities that deliver physical, mental, and social wellness benefits."

Hawkes said that the sales that are happening this year are mainly from all-cash buyers who can afford to purchase these luxury properties without taking on high-interest mortgages. 

"Seventy or 80% of the people who have purchased in these high-rise luxury projects are cash buyers," she said. "Because the mortgage rates are so high, you effectively eliminated upwards of 50% of your market."

Beyond the new high-rise towers, the overall condo market has been affected by high interest rates this year, as owners have avoided selling because they want to hold on to their lower rates. 

For the first time in seven quarters, overall condo sales in Boston saw a year-over-year bump last quarter of 2.4%, but they were still down 10.6% from pre-pandemic levels, according to Douglas Elliman's third-quarter report.

That shortage of inventory has kept sale prices high, as the average price recorded for a condo in downtown Boston last quarter was $1.6M, the second-highest ever, according to the report. The price marks a 32.5% increase from 2022.

Miller, who authored the Elliman report, said the drop in sales usually leads to a growth in inventory, but in the third quarter, it was down 12.8% compared to Q3 of 2019.

"What's been unusual is that when a market pivots, we have an external event like the Fed policy pivot 18 months ago, we expect inventory to surge as sales slow down," Miller said. "Inventory has declined almost every month, every quarter for the last two years."

Condo owners have been hesitant to sell because many locked in lower mortgage rates before the sharp rise began last year, Miller said.  

"Owners of properties are remaining essentially married to their rate if you bought something in the last four years," Miller said. "You're going to be reluctant to put your property on the market. So despite the surge in mortgage rates, that's why we're seeing prices rise, because there is a lot of competition in the market."

Like other sectors of the commercial real estate industry, new construction of condo projects has become difficult to finance due to the high-interest-rate environment. This has dramatically slowed the pipeline of new development, meaning the new condos from the previous boom will soon have less competition and an easier chance of selling. 

One of the only major condo developments under construction in the city is Hines' South Station Tower, which began pre-sales on units in September. With little new construction to enter the market in the upcoming years, condo prices are expected to continue to rise as inventory lags.

"The rate spike is going to sharply slow the pipeline coming into the market, reducing the viability of developing the volume of condos that we've just seen, which has been rapidly absorbed," Miller said. "There's going to be a lull in development in the next couple of years." 

Miller added that this slowing pipeline will reduce the need for developers to take out new loans to extend their runway like the developers of the St. Regis and Parker projects did this year. 

"I suspect this is a moment where we're seeing it, but it's not likely something that's going to expand in usage, because there's less and less product available as time passes, without new product taking its place," Miller said.