Five reasons for the multifamily boom in 2015 - by Carl Christie

Carl Christie, NAI Hunneman

With only a few weeks left in 2015, to say the multifamily market has exploded this year would be an understatement. At NAI Hunneman, our multifamily team which includes myself, executive vice president of the capital markets group, is closing in on total sales of $100 million in multifamily deals this year.

Why was there a boom in sales this year? What areas in Greater Boston are heating up? And will this momentum continue?

Here’s what I have to say:

1. Owners are waking up to the fact that values are at record highs. Well advised real estate investors know that to sell into strength makes sense. The perception and reality is that interest rates will rise, therefore causing adjustments in value. Local investors in the Boston area are watching what the institutions are doing – which is selling at peak values to capture gains. Some well-located properties that were purchased 3-4 years ago have doubled in value, when values increase so rapidly, many owners will realize these substantial profits and sell.

2. Capital gains have increased. At the end of 2012 there was a capital gains increase. After that capital gain increase, we saw a drop off of sales activity specifically with the local investor, that lull lasted about 18 months (2013 through summer 2014). The last 15 months have seen a vibrant increase in activity and that’s attributed to people absorbing the capital gains hype. Any time there’s a change in tax law, it takes a good year for the market to digest it.

3. Repeal of 1031 exchange. There’s been talk about repealing 1031 exchange which is an IRS-sanctioned way to defer paying capital gains taxes on investment property. This could be another reason why activity has been so high.

4. Location where there is a lot of activity. We are seeing multiple offers, competitive bidding and recording breaking pricing within route 128 (Greater Boston); especially in Cambridge, Somerville and Brookline. Apartment rental rates have risen every year (although softening has been reported) and investors are buying properties below replacement costs.

5. Value separation between the apartment and the condo. An anomaly that we have witnessed for several years is the value of these well located apartment properties are worth more to apartment building operators than to condo converters.

Carl Christie, executive vice president, NAI Hunneman capital markets group, Boston.