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Class C leasing fuels overall net absorption. An influx of 8,700 units Construction:
new units and elevated rents have begun to weigh on Boston’s will be completed Completions pick up from the
Class A apartment vacancy rate, which has climbed 200 basis 8,200 apartments delivered in
points since 2011. By year end, nearly 23,600 rentals will have 2017. Quincy and Cambridge/
been placed into service during the past three years with Class Somerville will receive more that
A effective rent resting at roughly $1,000 more per month than a 1,000 units each.
the metrowide average, a spread that has increased considerably
compared with the prior cycle. Elevated rents in top-tier units are 10 basis point Vacancy:
preventing many renters from transitioning into newer apartments Demand will tick vacancy
decrease in vacancy
and keeping Class B/C vacancy tight. In particular, vacancy in down marginally for a second
Class C rentals has remained in the 3 percent band or below consecutive year to 4.1 percent.
since the second quarter of 2014. Tight conditions have spurred In the previous year, the rate also
rent growth in the asset class during this time, averaging around dipped 10 basis points.
5.5 percent annually.
5.1% increase Rents:
Elevated completions in Quincy and Cambridge/Somerville The average effective rent climbs
in effective rents
weigh on vacancy. Deliveries pick up this year, potentially to $2,287 per month, a new cy-
reaching the cyclical peak. Completions will be widespread, clical high. In 2017, effective rent
though the Cambridge/Somerville and Quincy submarkets will rose 3.9 percent year over year.
receive the most new supply. The inflow of units in both locations
will keep vacancy on an upward trend and slow the pace of rent
growth below the metro average as space begins to lease.
Investment Trends
• Still-tight vacancy and strong demographics continue to sustain
Local Apartment Yield Trends
investor interest for Boston’s apartment assets, increasing sales
Apartment Cap Rate 10-Year Treasury Rate
velocity over the past 12 months. Institutional buyers remain
active in many of the metro’s popular areas including the Back
8%
Bay and near the numerous colleges and universities. Assets
6%
in these areas can change hands with returns in the low-4 to
mid-4 percent range.
Rate
4%
• The bulk of investors are private buyers acquiring Class C
2%
assets in the $1 million to $10 million price tranche. In particular,
properties in East Boston and within the Chelsea and Lynn
0% neighborhoods were targeted during the past four quarters.
00 02 04 06 08 10 12 14 16 18* Cap rates for these assets can range between 100 and 200
basis points higher than the metro average of 5.2 percent.
• Metrowide, most transactions comprise smaller complexes of
less than 50 units. Many properties were built prior to the 1970s.
Elevated completions, though, will likely provide investors
* Cap rate trailing 12-month average through 2Q; Treasury rate as of June 28.
Sources: CoStar Group, Inc.; Real Capital Analytics opportunities for top-tier assets moving forward.
The Boston metro consists of the following counties: Essex, Middlesex, Norfolk, Plym-
outh and Suffolk.
Boston
2Q18 – 12-MONTH PERIOD
Employment Trends EMPLOYMENT:
4%
Metro United States
1.6% increase in total employment Y-O-Y
Year-over-Year Change
* Forecast
Multifamily Research | Market Report
DEMOGRAPHIC HIGHLIGHTS
FIVE-YEAR POPULATION GROWTH* 2Q18 POPULATION AGE 20-34 2Q18 MEDIAN HOUSEHOLD INCOME
(Percent of total population)
123,800 Metro 22% Metro $88,022
U.S. Median $61,179
U.S. 21%
80,000
Metro 44% 59% Own
U.S. Average 29%
* 2017-2022 **2016
Lowest Vacancy Rates 2Q18 Property Values Climb Higher, Enticing Some
Owners to Market Their Assets
Y-O-Y
Vacancy Effective Y-O-Y %
Submarket
Rate
Basis Point
Rents Change • Healthy property performance continues to drive
Change
investors to the Boston metro with transaction velocity
rising roughly 13 percent during the past 12 months.
Plymouth County 2.4% -80 $1,848 3.8% • Heightened demand for the metro’s assets lifted
SUBMARKET TRENDS
Counties
$255 12%
Fenway/Brookline/Brighton 4.0% -30 $3,105 3.4%
$170 8%
West Norfolk County 4.1% 30 $2,085 6.4%
$85 4%
Overall Metro 3.9% 0 $2,267 3.4%
$0 0%
14 15 16 17 18*
CAPITAL MARKETS
Treasury rate, which has more than doubled over the past two
Private, 63% years to 2.85 percent. However, capital inflows as investors
Listed/REITs, 4%
seek alternative investment options are holding the rate below
3 percent.
• Borrowing costs rise, cap rates remain compressed. Debt
Apartment Mortgage Originations providers are facing a rising cost of capital, leading to higher
By Lender lending rates for investors. To compete for loan demand, some
100% lenders may choose to absorb a portion of the cost increas-
es while others will require higher equity stakes up front. More
Percent of Dollar Volume
75% Gov't Agency complex and creative approaches to financing properties may
Financial/Insurance begin to emerge as investors seek to reach return objectives.
Reg'l/Local Bank
50%
Nat'l Bank/Int'l Bank • Lending market remains competitive as interest rates
CMBS rise. Government agencies continue to consume the largest
25% Pvt/Other
share, just slightly over 50 percent, of the apartment lending
market. National and regional banks control approximately a
0%
12 13 14 15 16 17
quarter of the market. Multifamily interest rates currently reside
in the mid-4 percent to mid-5 percent realm with maximum
Include sales $2.5 million and greater
leverage of 75 percent. Portfolio lenders will typically require
Sources: CoStar Group, Inc.; Real Capital Analytics loan-to-value ratios closer to 70 percent with interest rates in
the low-4 percent to low-5 percent span.
Price: $250
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no
representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment
growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intend-
ed to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered
as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; National Association of Realtors; Moody’s Analytics; Real Capital
Analytics; RealPage, Inc.; TWR/Dodge Pipeline; U.S. Census Bureau