Boston’s newly passed city ordinance, which prohibits property owners from hosting short-term rentals in homes they don’t live in and aims to make data on short-term rental properties more widely accessible, is one of many efforts across the northeast to regulate the short-term rental industry. As the short-term rental industry has grown – Airbnb alone now boasts more than 5 million listings – the number of affordable multifamily housing units available has dwindled. Consequently, as supply has diminished, the ability to secure units in already competitive metro markets has become increasingly difficult.
Gentrification is breathing new life into neighborhoods across Greater Boston. A recent report by Governing Magazine shows that since 2000, more than 20 percent of the Census tracts in Boston that were eligible for gentrification have done so, resulting in a 50 percent increase in home prices in some neighborhoods. Most recently, East Boston, South Boston and Dorchester have begun to reap the benefits of gentrification, spawning new development which is, in turn, driving up asking rents. As these neighborhoods come into their own, offering improved access to transportation and jobs, investors can benefit from buying undervalued Class-B and Class-C assets and making capital improvements that will lay the foundation for increased occupancy, sustained rent growth and higher returns.
Adaptive reuse and transit-oriented development are two prominent trends shaping the Northeast investment real estate market. As vacant office properties, abandoned mills and defunct retail assets are adapted for new uses such as multifamily housing, investors have opportunities to acquire Class-B and Class-C assets below market value and create the conditions to establish and maintain in-demand housing units.
While continued delivery of new construction Class-A multifamily is resulting in softer rent growth and occupancy at the high end of the Boston area market, savvy investors are continuing to seek Class-B and Class-C opportunities in neighboring submarkets where they can add value to existing multifamily, mixed use and retail properties, and maximize returns. For these value-added investors, Boston’s North Shore and Merrimack Valley submarkets offer such properties in close proximity to mass transit, highways and downtown amenities.
As the first quarter of 2017 draws to a close, multifamily assets continue to trade at record high rates in both Boston and New York City. As many investors explore opportunities in neighboring communities where undervalued Class-B and Class-C assets offer the opportunity to make modest capital improvements, raise asking rents and generate returns, markets such as Framingham and Worcester are thriving. In 2016, Worcester and Framingham ranked first and second among I-495 corridor submarkets for transaction volume in the $1 million to $10 million range. In November 2016, MetroWest Daily News reported commercial property values in Framingham had risen close to 12-percent per a review by the town’s assessing department.
While much of the new multifamily inventory hitting the marketing is Class-A product, the development of affordable housing units is declining slightly, according to the National Council of State Housing Agencies. For investors and developers with an interest in the multifamily market, there are affordable housing credits and incentives available to minimize the risks and maximize the returns of engaging in this market.
Northeast Private Client Group has reported throughout 2016 that assets in New York City and Boston are trading at record-high valuations for this cycle. In New York City, deal flow has slowed considerably since Q1-2016 and value-added investors are exploring opportunities in submarkets outside the City including Connecticut and the Hudson Valley. Similarly, in Boston, ranked as the third most expensive U.S. market for multifamily rents at the end of last year, valuations for income properties have hit historic highs for this cycle, as investors are increasingly less likely to bid down capitalization rates any further. Despite strong demand for multifamily and commercial assets in both markets, one is left to question if either or both of these markets may be “overvalued.”
As cap rates compress in the neighboring Boston and New York City markets, investors are driven to explore investment opportunities in the Springfield, Mass. and Hartford, Conn. markets. Both of these markets are unique in that cash flow at point of entry is what largely determines a good investment, as opposed to other markets which have the potential to raise rents and grow income dramatically.
The Boston multifamily market is booming. With sustained rent growth and high occupancy, investor competition continues to drive down cap rates and drive up sales prices. Further, rents are so high inside the 128, that well-funded investors can often justify building new assets over investing in existing properties.
Over the past ten years, we have seen a significant evolution in the multifamily market as homeownership rates nationwide have steadily declined, reaching a 50-year record low in 2015. During a recent presentation for the Institute of Real Estate Management, Connecticut Chapter, I shared insights on national trends and the regional multifamily housing market. Here are some highlights: