Boston's Multifamily Market Reaches Record Heights Amid Investment Boom

Investors have driven the Greater Boston multifamily market to new heights, boosting the price per unit in Q2 to a record $329K per unit, according to data from Real Capital Analytics.

Two recent $300M-plus purchases in Boston and Cambridge by mega-investors KKR and Blackstone have made a splash while Chicago-based Equity Residential spent $134.5M on a Burlington asset in one of the suburbs' largest deals of the year.

Buyers are encouraged by the region’s booming life sciences market that will bring with it a flood of highly paid workers, developers said. Rent is showing signs of rebounding in Greater Boston and incoming faculty and students this fall will drive demand further, according to researchers. Ground-up development carries with it high construction costs and regulatory barriers, experts said, keeping supply limited and driving the market’s fundamentals up.

“The level of demand for assets in the city is unprecedented,” Colliers Boston Investment Sales Vice President Kendin Carr said. “There’s so much capital out there chasing so little supply. The demand is going to drive values up, it’s going to drive cap rates lower.”

Investors have spent more than $1.5B in the Boston market in 2021, according to Real Capital Analytics. The volume is the 11th-most in the country, surpassed by billions spent in Southern metro markets, RCA reported. However, the Boston market had the nation’s second-highest price per unit in Q2 behind Orange County, California, and just ahead of Manhattan, according to Lee & Associates' Q2 research. 

The average cap rate for multifamily assets in Boston sits at 4.6%, below the national average of 5.4%, the report stated. Developers and brokers said they’ve seen assets sell at cap rates in the 3% range, valuations typically reserved for new luxury assets in prime locations, The Procopio Cos. CEO Michael Procopio said. 

KKR paid $332M for Crescent Heights’ NEMA Boston development in the Seaport earlier this month. The deal amounts to $802K per unit, one of the highest sales per unit of complexes 50 units or greater in Boston history, according to Colliers National Director of Capital Markets Research Aaron Jodka. Blackstone, in its $325M purchase of an Avalon Bay Communities complex last month, paid $660K per unit for an East Cambridge apartment tower.

Representatives for KKR and Blackstone didn’t return requests for comment. Firms behind other $70M-plus multifamily purchases in the past two quarters in the Greater Boston market didn’t respond to inquiries. 

Investors are splurging in both the inner core and suburbs home to emerging life sciences clusters, brokers said. Life sciences developers are reaching into new neighborhoods inside of the Interstate 495 belt for lab developments, making existing suburban assets more attractive. The industry is expected to add millions of square feet of lab space in the next couple of years.  

Experts said they believe the pipeline will bring with it high-income, highly qualified renters, which will spur long-term rent growth.

“They look at the challenges with permitting in Boston right now,” CBRE Vice Chairman Biria St. John said. “Meaning, it’s going to be more difficult to get more projects permitted and approved, which again, supply and demand, that does likely translate to better long-term rent growth.”

Challenges in ground-up multifamily development range from expensive land, pricey material costs and municipal requirements on affordability that don’t pencil out, developers said. Lumber costs reached a record-high in May while construction materials like copper and fuel have also risen 25% to 30% in the past year, according to CoStar Group data reported by The Wall Street Journal. The factors have brought the average cost of construction for an individual multifamily unit to approximately $410K, Procopio said. 

“One of the calculations we have to make is, is it worth our pursuit costs, sometimes the answer’s yes, sometimes it's no,” he said. “The reality is we’re not going to bring on that supply. That causes rents to rise.”

Affordability measures by municipalities also pose a significant challenge for developers. Boston city councilors this week approved a measure preventing affordable housing from being converted to market-rate rentals, a measure that the Boston Municipal Research Bureau said would discourage development, the Boston Globe reported. The measure still requires approval from both Boston acting Mayor Kim Janey and the Massachusetts State House. 

Cambridge in 2017 instituted a 20% affordability requirement for multifamily projects, a move that has hindered large apartment projects from being developed, St. John said. 

“Since then, no new high-rises have been built because they can’t make the economics work,” he said. “Combined with the lower revenue they generate, it means they can’t make it work.”

Rents for existing assets have rebounded from pandemic depths and grew at the sixth-fastest rate nationwide in June, according to ApartmentList. The market’s rents have risen slightly in the past year compared to San Francisco, Seattle and D.C., among the nation’s highest and also home to burgeoning life sciences clusters. On average, a one-bedroom apartment in Boston runs at $1,950, only surpassed by the Bay Area and New York City.

The region’s major institutions including Harvard University, MIT, Boston University and Boston College have all pledged a return to in-person learning this fall, which experts who spoke to Bisnow all attributed to encouragement for increased demand and continued rent growth.

Leasing activity has already rebounded at The Overlook at St. Gabriel’s, an apartment complex by Cabot, Cabot & Forbes built from a redeveloped church and monastery, the firm’s executive vice president John Sullivan said. The complex spans 555 units and leased 200 units in June bringing it to 80% occupancy largely to residents tied to local institutions, he said.

“The last couple of months have improved dramatically,” Sullivan said of the rental market. “it starts with the institutions again.”

Developers and experts downplayed potential capital gains and 1031 exchange changes as causes for a recent spike in investment activity. The 1031 exchange, or like-kind transactions, allow investors and building owners to sell assets and deploy capital gains into another property to delay tax payments. Elimination of the 1031 exchange could be devastating to the multifamily market, industry experts have warned.

Multifamily properties remain among the safest investments among commercial real estate asset classes, Yardi Matrix Business Intelligence Manager Doug Ressler said.

"From an NOI perspective and an asset appreciation perspective, there’s less risk in those commodities of asset classes right now than anything else," he said.