Multifamily Research

Market Report Third Quarter 2018

Boston Metro Area

Lower Rents Heighten Demand

For Class C Apartments in Boston Multifamily 2018 Outlook

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

• More than 33,500 positions were created during the first

3%
half of the year, contributing to a year-over-year total of
43,500 jobs. Hiring was led by the professional and busi-
2%
ness services sector with 19,700 positions.
1% • Job growth cut the unemployment rate 30 basis points to
3.1 percent in June. The tight rate is making it increasingly
0% difficult to find qualified workers.
14 15 16 17 18*

Completions and Absorption CONSTRUCTION:

Completions Absorption 8,600 units completed Y-O-Y

12 • More than 8,600 apartments were completed during the

Units (000s)

year ending in June after 7,700 units were finalized the

9
prior year.
6
• An additional 16,000 units have broken ground with
3
scheduled completions through 2021. One of the largest
projects underway is Fenway Center. The complex will
0 be home to 550 market-rate apartments.
14 15 16 17 18*

Vacancy Rate Trends VACANCY:

6%
Metro United States 0 basis point change in vacancy Y-O-Y

5% • Vacancy held steady at 3.9 percent during the past 12

Vacancy Rate

months. The rate has remained below the 5 percent

4% equilibrium since 2009.
• While metrowide vacancy has held steady, several
3%
submarkets posted vacancy declines. In the Intown
2%
Boston submarket, the rate plummeted 90 basis points
to 4.3 percent.
14 15 16 17 18*

Rent Trends RENTS:

Monthly Rent Y-O-Y Rent Change 3.4% increase in effective rents Y-O-Y
$2,400 8% • The average effective rent climbed to $2,267 per month
Year-over-Year Change
Monthly Effective Rent

in the second quarter. During the prior year, effective rent

$2,100 6%
rose 3.0 percent.
$1,800 4% • Rent growth was led by Class C units during the last 12
months. Rent jumped 6.3 percent in these apartments to
$1,500 2% $1,502 per month. Class B apartments followed, as rent
increased 3.2 percent to $2,161 per month.
$1,200 0%
14 15 16 17 18*

* 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%

1Q18 TOTAL HOUSEHOLDS

FIVE-YEAR HOUSEHOLD GROWTH* POPULATION OF AGE 25+

PERCENT WITH BACHELOR’S DEGREE+**
41% Rent

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

the average price 2 percent to $312,000 per unit.

South Essex County 2.5% -110 $1,862 3.6% Property values are up more than 50 percent from the
SALES TRENDS

prior cyclical peak.

Marlborough/Framingham 3.3% 10 $1,777 2.5%
Outlook: Owners looking to capitalize on elevated prices
Lowell 3.3% 40 $1,710 -0.9% may consider listing their assets. Increased construction
may provide investors additional opportunities at the top
East Middlesex County 3.5% -90 $2,171 3.1% end of the market.

Waltham/Newton/Lexington 3.7% -10 $2,686 3.8%

Sales Trends
North Essex County 3.7% 20 $1,643 4.1% Sales Price Growth
Average Price per Unit (000s)

Rockingham/Strafford $340 16%

3.9% 120 $1,285 2.6%
Year-over-Year Growth

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*

* Trailing 12 months through 2Q18

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Multifamily Research | Market Report

By WILLIAM E. HUGHES, Senior Vice President,

2Q18 Apartment Acquisitions
By Buyer Type Marcus & Millichap Capital Corporation
• Healthy economy and inflationary pressure drive rate in-
Other, 1% Cross-Border, 9%
creases. The Federal Reserve appears committed to normal-
izing the fed funds rate, but further action could be restrained
Equity Fund this year as headwinds could weigh on the economy. Economic
& Institutions, 23%
growth and inflation have had a dramatic effect on the 10-year

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.

National Multi Housing Group

Boston Office:
Visit www.MarcusMillichap.com/Multifamily
Tim Thompson Regional Manager
100 High Street, Suite 1025
John Sebree Boston, MA 02110
First Vice President, National Director | National Multi Housing Group (617) 896-7200 | tim.thompson@marcusmillichap.com
Tel: (312) 327-5417
john.sebree@marcusmillichap.com

Prepared and edited by

Catherine Zelkowski
Research Analyst | Research Services

For information on national apartment trends, contact:

John Chang
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700
john.chang@marcusmillichap.com

Price: $250

© Marcus & Millichap 2018 | www.MarcusMillichap.com

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