Looking in the rear-view mirror: what were the noteworthy trends in 2017? Looking ahead: what will 2018 bring to Boston markets?
It’s Boston. It’s the economy. What a city! Booming Boston is a great place in which to live and work. For most. Demand for skilled workers is highly competitive. This probably won’t change: whatever it is about Boston, workers and companies want to be here.
Population Growth. After decades of worry about shrinking population, Boston’s has increased; many other urban areas have suffered declines. It’s not just Downtown or Seaport but growth has also occurred along Rte.128.
Interest Rates / Inflation. Interest rates are headed up; markets expect this and have compensated for it. A new fed chair doesn’t appear to worry capital. While uncertainty is a factor, markets seem willing to deal with it rationally.
Cost of capital is manageable. Fears of cash flow erosion in light of slightly higher rates seem to have subsided.
Everybody continues to benefit from the low interest rate party; this should continue through 2018. Anecdotally, banks seem to maintain discipline in a competitive marketplace flooded with capital. The negative is the destabilizing effect of lenders willing to chase not very good deals.
Inflation may become a factor, eventually. Keep a watch on that.
Housing. MLSPIN notes that there were 53,000 2017 Massachusetts single-family sales transactions; not much of a change much from 2016. The median statewide price was $380,000, up nearly 6% from the median $359,000 in 2016, which was up nearly 4% from $346,000, the 2015 median. Condos showed more volatility. Small multi-family market show severely constrained inventory in close-in markets.
Marketing times were down again. Sales price/list price ratios continued at nearly 100%.
What happens to housing in 2018? The markets continue to have legs despite some of the highest housing costs in the nation. New housing continues to be created and absorbed. Many markets could use more new product. Demand is there.
Multi-Family Markets. What about rental housing? The days of constant rent increases are probably behind us. Some have raised the specter of overbuilding, but there still is an awful lot of demand close to Boston from workers, families, boomers/empty-nesters, and others needing housing and wanting newer housing. Much of the area’s housing stock is way past a reasonable point for orderly replacement. New units aren’t just fueling a speculative boom, aided by cheap and eager money, but represent needed new additions to replace those aging, obsolete units.
Multi-family is still the darling of investors and lenders of all types. Despite major multi-family creation in the Boston metro, there remain areas of unsatisfied tenant demand and consequent investor opportunities.
Construction. Steep barriers to entry and high costs will continue to make eastern Massachusetts a premium market with low affordability. The hurricanes have had an effect on both construction material and labor costs. Locally, the pace of construction has driven up costs and increased development.
Commercial (CRE) Markets. CRE in 2017 experienced stability. Investors still yearn after solid deals and many settle for secondary and tertiary markets for value add propositions.
Locally, inventories are tight: strong local, national and international investor demand for the quality a Boston location provides continues to push prices.
Capitalization rates aren’t going any lower. But, neither are they poised to go much higher. Equity and debt investors appear to adopt a steady as it goes philosophy. Higher financing costs do not presently translate into higher cap rates. There is no shortage of players willing to take a place at the table if someone opts out.
Tax Reform. Somewhat of a wild card. Nothing wrong with tax reform; it was long overdue. It’s too bad that it was rushed through.
A steep long real estate recession occurred after the last major tax reform in the late 1980’s. Was there a cause and effect? The real estate bust was fueled by deregulation, easy money, and not immediately unforeseen consequences due to tax law changes. Real estate was flying then, too, coming out of the Volcker era of high interest rates. Something to watch, to be sure.
Conclusion. Is there dumb money out there? To be sure. On the other hand, there appears to be a growing discipline and realism about real estate investing, one that doesn’t predict doom around the corner, but which takes into account the long length of this expansion and boom cycle. Smart investors realize that the party will end and don’t want to end up on the thin end of the tree limb.
Warning signs are likely to be show first in residential markets. Unabated, and growing speculative, demand for limited product, coupled with available cheap money make for a recipe creating a potentially ruinous upward pricing spiral. Consider the last crash; the troubles began when markets stopped looking at real estate as real estate. Nothing, however, is signaling drastic changes. Bears watching though.
There was cause for much enthusiasm in Massachusetts markets in 2017. “Persistent optimism” should continue through 2018. Why persistent? There just isn’t very much to point to that is being fueled by unstable and unsustainable forces. Product comes onto market and gets absorbed. Prices and rents trend a little higher and buyers buy and renters still rent. So the optimism continues. It’s persistent given a continued moderate growth scenario. Look forward to 2018. We’ll worry about 2019 when it’s time.
Bill Pastuszek, MAI, ASA, MRA, heads Shepherd Associates, Newton, Mass.