I have been covering the Boston real estate market in terms of sales quite a bit, but what is going on in the apartment rental market?
Marcus and Millichap just released their 2009 apartment market outlook which I always look forward to since it gives a nice overview of the top apartment markets around the country. You can read the full version here, but in terms of the national macro-economic fundamentals of the apartment market here are some of the highlights....
Fewer buyers mean more renters:
Despite some weakness, apartments will register the healthiest fundamentals among major commercial property sectors. The U.S. homeownership rate rose from 66 percent in the late 1990s to more than 69 percent in late 2004. Since
2005, the rate has declined to less than 68 percent, or by 2.6 million households, most of whom are likely renters.
Job losses will lead to slightly higher vacancy rates:
The national apartment vacancy rate is forecast to increase 100 basis points in 2009 to 7.7 percent due to job losses and competition from shadow rentals.
Rents should stay essentially flat nationwide (although local metro areas will vary greatly):
Average effective rents nationally will be flat in 2009, while asking rent growth is expected to reach 1.7 percent. Rent trends will vary greatly at the metro level, with owners in the hardest-hit housing markets reducing rents and offering significant concessions to attract and retain renters.
So what's the story locally for the Boston apartment market*?
- Employment Forecast: The metro’s high concentration of professional and financial jobs makes it particularly vulnerable to the economic downturn. In 2009, payrolls will decline by 46,000 positions, or 1.9 percent. Last year, 27,800 jobs were eliminated.
- Construction Forecast: Developers are responding to weaker demand by slowing multi-family construction activity. Approximately 2,100 apartments are scheduled to be completed this year, following the delivery of 3,300 units in 2008.
- Vacancy Forecast: Vacancy is forecast to rise 80 basis points in 2009 to 7.5 percent. Last year, when construction was more robust, vacancy increased 100 basis points.
- Rent Forecast: As vacancy edges higher, rent growth will moderate. Asking rents are expected to gain 2 percent in 2009 to $1,777 per month, while effective rents advance 1.4 percent to $1,679 per month.
- Investment Forecast: Investors will continue to pursue value-add properties in the months ahead. Seasoned local buyers may pick up their activity by year end, seeking discounts on smaller, distressed assets with operational challenges.
Job losses and competition from shadow rentals will continue to impact
Class A apartment vacancy in Boston’s outlying submarkets, while core
assets are expected to outperform. The economy is weakening, as
evidenced by layoff announcements from major employers such as Boston
Scientific, Gillette and the state government. In addition, the unraveling
financial markets could result in far-reaching cuts by local financial
companies. As a result, uncertainty is prompting some renters to transition
into less expensive housing to trim costs. Class A properties in the outlying
submarkets of North Shore and Mystic River North/Route 128, both of
which thrived during the housing boom, will compete with shadow-rental
stock this year, pushing vacancy higher. Lower-tier apartments in Cambridge/
Watertown and Brookline/Brighton are expected to perform well
due to consistent student demand and renters seeking more affordable
housing close to the city.
The economy is weakening (no shock there!) which should increase vacancy for the metro market area. But, core downtown apartments are expected to outperform the market because demand will remain strong from of the desirability of living in or close to Boston. On top of that, the rate of new construction is slowing, keeping the supply tight.
Bottom line: If you're a renter looking for a sweet deal in Boston, it still will remain hard to come by, even in the face of economic weakness.
At Charlesgate Realty Group, a large portion of our business is servicing the Boston rental market (both leasing apartments and representing buyers/sellers of investment property) so if you have any questions please feel free to contact me. Or to search our Boston apartment database, go here.
*Note: This information from the Marcus and Millichap report is referring to the entire Boston Metro area market. The report differentiates the entire metro area from the core downtown Boston area, stating that core and downtown areas will continue to outperform much of the market. Good for owners, bad for tenants I suppose.
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