Unless you’ve been living in a cave the past few years, it’s impossible not to notice the tremendous amount of apartment supply hitting Boston, though we are not unique in this regard, as many metropolitan areas around the country are in a similar situation. The key part of the story in Boston, as with most markets across the U.S. is that supply has been heavily focused in just a few submarkets. These submarkets are where rents are suffering, particularly in class A buildings, often the rest of the metro is humming along just fine.
However, before getting into the weeds, let’s talk about just how much supply Boston is getting. From 1982 to 2011 inventory growth in Boston averaged 1.4% annually, about 40 bps below the U.S. average, but from 2011 to today that number has jumped from 3.1%, or almost double the U.S. average. This puts Boston in company with metros like San Antonio, Charlotte, and Orlando, places people normally associate with lots of building, not “not in my backyard” (NIMBY) Boston. During the entire decade of the 90’s, Boston delivered about 4,800 units in commercial apartment buildings, defined as properties with at least five units. In 2019 alone we are expected to double the amount of units in the 90s with 9,700 units hitting the market. Since 2011 the metro as added over 40,000 units. In fact, one would likely have to go back to the 1920s to find supply growth as a percentage like we’re seeing today.
So what happened to cause all this supply? Like most trends, it was a combination of factors. First, was great rent growth caused by 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 1980s into the early 2000s, but since 2006 the metro added 183,000 people in that age group. As one could imagine adding that many people in their prime renting years has kept the demand for apartments pretty strong. As a side note, Boston had the best population earlier this cycle than it’s had since LBJ was president. So if it feels like Boston is getting more crowded that’s because it is.
The other major trend leading to the multifamily supply boom was financing. The post-recession economy made office, retail, and industrial fundamentals pretty weak and many banks at that time, and still now, aren’t willing to do any speculative projects in those property types. But thanks to agencies like Freddie Mac and Fannie Mae, the banks has been open for multifamily construction loans. And what do you do if you’re an office, retail, or industrial developer in a market where you can’t get financing to do what you do? You build apartments and hence that’s how we find ourselves looking at a new record year of supply in 2019.
After 2019, inventory growth in Boston, as in many metros begins to slow. In fact, from 2020 to 2022 we believe that annual supply will drop to a little over 6,000 units annually, though that would still be the heaviest for supply prior to 2014. This rapid slowdown in construction is caused by number of factors.
First, is a lack of new viable sites.
Second, is a huge increase in construction costs, as everyone in the industry uses many of the same subcontractors, who as they got more business than they could handle the past few years they raised their prices.
Third, local and regional banks are not lending like they used to, as in many cases they are full up on multifamily construction loans.
Combined these factors go 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 in Cambridge who have been forced to offering an increasing amount of concessions to attract and maintain tenants. Class B and C properties have been far less impacted by the glutton of apartment construction. And in the case of the suburbs, both in Boston and in many markets around the country, supply has not been overly heavy in these areas and they have often had better rent growth later in this cycle than the cities of Boston and Cambridge as people got pushed out to more affordable areas. This is particularly true for class C assets located outside of Rte.128.
Mark Hickey is a real estate economist for The CoStar Group, Boston, Mass.