William Pastuszek, Shepherd AssociatesQuestions and concerns abound about our current multifamily environment. Is it sustainable? Are we near the frothy peak, or, sliding down the other side? Are these residential markets going to cool off anytime soon?
Surveys - Some of the Q1 surveys characterized markets as (finally) moving down, or, sideways. The next set of surveys said, no no, markets are fine, never mind. So much for quarter-to-quarter volatility. Don’t rely overly on surveys done at 30,000 feet, or, if you do, be prepared to be regularly confused. Maybe we need more appraisers on those panels.
But let’s leave that kind of short term prognosticating for the stock market.
Stocks - Unless you are staying the course, this year of volatility wears, while all the incessant chatter about the up and down nature of markets, sub-par corporate profits, the effect of being in an election year, international instability, and so on. Investors hate uncertainty. Some greater expectation of certainty needs to become part of the investment landscape. Better yet, people need to believe that things have gotten, and, will continue, to get better, realizing that expectations need to be scaled and put into the perspective of the more muted tone of this decade as compared to pre-crash times.
Apartments - It’s fashionable to characterize the apartment market as overpriced and nearing the end of a long run up. Certainly, if we look at the markets in the middle of the country, that may be the case.
It looks less so on the coasts, where apartment markets keep booming.
Let’s take Boston. There continues to be significant construction that fuels growth of the apartment stock. While there are those who believe overbuilding is in progress or may be soon, others point to the very worn out apartment stock in Boston and indeed throughout New England, and rejoice in the revitalization and renaissance of apartments.
Over many years and more than a few downturns, Boston has managed to keep vacancy low and rents at the very least stable. Massachusetts (and Boston) has been experiencing population growth that is close to that of traditional “fast growth” areas. Burgeoning demand cries for better quality housing.
Developers will meet the need and opportunity with ground up new, or infill/rehab product. The other trend is in the design, layout, and amenities in the modern multifamily building. What are these pesky millennials are looking for? Living and working styles have changed over a generation or less and new housing accommodating newer preferences will need to be sufficient to meet demand.
Until vacancy starts to balloon and buildings offered for sale don’t get snapped up in a fortnight, and the Fed announces that really big rate hike, the Boston multifamily market is steady as it goes. The buyers will continue to be happy with those mid-4 caps.
Office - I know this isn’t multifamily, but it’s a related trend. Stay with me.
New buildings that have gone up (TripAdvisor) and those that will go up (GE) show a similar change in tastes. The traditional c. 1985 office building no longer does it for a new wave of office denizens. Office space is viewed and used differently than it was at the start of the millennium.
Developers have to react to meet these new demands and as a result some of those more traditional buildings will become a shade less competitive.
Plus, a lot of factors have contributed to a long term decrease in the need for as much office space per person. And many workers want to have their green smart buildings close to their sharp, small, but manageable apartments with a walk, bike trip, or T ride.
Luxury housing as an investment - Brokers, appraisers, lenders, and others raise the issue of the continuing development of ultra-high end downtown condos in Boston. A review of records show a large number of cash sales, and rumor has it that many buyers are off shore and are buying here as a safe haven.
Smart investors know that Boston is the 7th most attractive market generally for investment. There are plenty of even hotter markets out there. And do not forget New York City.
The doomsday scenario of which some speak is that if all the owners decide they need their cash, all these units will come onto the market at the same time and this flood of inventory will crash the high end market. Certainly possible. Is it probable? Consider this. If the world comes crashing down, the U.S. (and a couple of other countries) will continue to represent ultimate safe havens. It might be that in that crash those off shore investors will then have a place to live, here in Boston. I am not overly worried. These cash and near cash purposes express faith in the U.S. economy.
Meanwhile, closer to the ground, condominiums are booming. They represent a mildly more affordable alternative than single family housing.
Summing up. Good idea to keep careful watch on multifamily markets, in all their shades. While there is a goodly amount of “chasing deals” and conspicuous consumption and some uninformed buying (and lending) behavior, there is a lot of staying power in Boston markets. The outer fringe of this expansion, however, may be something to worry about. The ripple effect that touches those outlying areas last will have the downturn touching them first.
Enjoy the remnants of summer! Watch out for those surveys!
William Pastuszek, MAI, ASA, SRA heads Shepherd Associates, Newton Mass.