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Multifamily Research

Market Report Fourth Quarter 2018

Boston Metro Area

Elevated Home Prices and Housing

Shortage Keep Vacancy Tight Multifamily 2018 Forecast

Corporate expansions fuel household formation, rental 8,200 units Construction:

demand. A highly educated workforce is attracting and driving will be completed Deliveries pick up from the
corporate growth throughout Boston, particularly in the finance, 7,800 units completed last year.
tech and medical sectors. PNC and JPMorgan Chase have The Cambridge/Somerville and
announced considerable expansions and some international Quincy submarkets will receive
companies, including Log-Point, are setting up their North the most new units.
American operations in the metro. This growth continues to draw
more residents and underpins household formation, fueling the 40 basis point Vacancy:
need for quality housing. High home prices, however, are putting The net absorption of more than
decrease in vacancy
homeownership out of reach for many, boding well for apartment 9,400 rentals will push vacancy
demand. As a result, vacancy rates remain considerably tight, down to 3.8 percent. In 2017, the
resting below 4 percent in the third quarter. rate ticked down 20 basis points.

Renters fill Class C spaces. The still-tight vacancy rate is

creating a shortage of housing throughout Boston, particularly 5.1% increase Rents:
for lower-income households. Consequently, vacancy in Class C Tight vacancy is supporting rent
in effective rents
apartments has held below 3 percent during the past two annual growth with the average effec-
periods ending in September. Effective rent in these spaces is tive rent climbing to $2,283 per
roughly between $700 and $1,800 per month less than Class month metrowide in 2018. Last
A/B spaces, making it difficult for many individuals to transition year, rent jumped 3.8 percent.
to newer apartments. Continued household growth and net
migration will drive further demand for apartments, particularly as
construction moderates in the coming years.

Investment Trends
Local Apartment Yield Trends • Limited listings in Back Bay/South End and Downtown are
elevating property values considerably in both areas. Investors
Apartment Cap Rate 10-Year Treasury Rate
are primarily bidding for smaller properties of less than 100 units
that were built prior to the 1970s. Construction of several larger
complexes is underway in proximity to these areas, potentially
6% providing investors additional opportunities at the top end of the
market moving forward.

• Higher returns and lower entry costs continue to sustain
2% demand north of the core. Properties in Chelsea and in Lynn
were particularly targeted during the past 12 months. Both
0% cities respective submarkets experienced considerable vacancy
* 00 02 04 06 08 10 12 14 16 18*
improvement during this time. First-year returns in these areas
averaged at least 100 basis points higher than those found in
most neighborhoods of Boston.
Sales Trends
Sales Price Growth • Metrowide, strong demand has placed downward pressure
on cap rates, averaging in the low-5 percent band in the third
rice per Unit (000s)

$340 16% quarter after a 30-basis-point year-over-year decrease.

* Cap rate trailing 12-month average through 3Q; Treasury rate as of Sept. 28
Year-over-Year G

Sources: CoStar Group, Inc.; Real Capital Analytics

The Boston metro $255 8% Norfolk, Plymouth, Suffolk, Rockingham and Strafford
consists of the following counties: Essex, Middlesex,

$170 0%
Employment Trends EMPLOYMENT:
Local Apartment Yield Trends
Metro United States 1.7%
Apartment Cap Rate
increase 10-Year
in total Treasury RateY-O-Y
Year-over-Year Change

8%Approximately 47,100 positions were created since last
3% October, building on the 39,400 jobs added the prior year.
The jobless rate remains in the low-3 percent band, mak-
ing it difficult for employers to find quality workers.

1% • Hiring was led by the professional and business services
sector, which created 21,200 positions during the past
0% 12 months.
14 15 16 17 18* 00 02 04 06 08 10 12 14 16 18*

Completions and Absorption CONSTRUCTION:

Sales Trends
Completions Absorption 8,600Sales Price Growth
units completed Y-O-Y

Average Price per Unit (000s)

$340 16%
12 • Building on the 7,200 units finalized the prior year, roughly

Year-over-Year Growth
8,600 apartments were added to inventory
$255 8% the past
Units (000s)

12-month period ending in September.
$170 0%
6 • More than 14,700 rentals are underway with deliveries
scheduled through 2021. The largest -8%
$85 project completed
so far this year is the 447-unit Montaje located in the
0 Cambridge/Somerville submarket. -16%
14 15 16 17 18* 14 15 16 17 18*

Vacancy Rate Trends VACANCY:

Metro United States 50 basis point decrease in vacancy Y-O-Y

• After remaining flat the prior year, metrowide vacancy fell
Vacancy Rate

50 basis points to 3.5 percent in the third quarter. Class

4% B space led the biggest decline with rates falling 80 basis
points during the past 12 months to 3.7 percent.
• Increasing demand in core Boston cut vacancy 90 basis
points during this time to 3.9 percent and supported
rental increases of 4.5 percent to $3,646 per month.
14 15 16 17 18*

Rent Trends RENTS:

Monthly Rent Y-O-Y Rent Change 3.8% increase in effective rents Y-O-Y
$2,400 8% • Still-tight vacancy is supporting increases in the average
Year-over-Year Change
Monthly Effective Rent

effective rent. Growth remained on par with last years,

$2,100 6% rising to $2,299 per month metrowide in September.
$1,800 4% • Below-4 percent vacancy is supporting above-average
rent growth in Plymouth County. Here, effective rent
$1,500 2% jumped 5.8 percent during the past four quarters to
$1,915 per month.
$1,200 0%
14 15 16 17 18*

* Forecast
Multifamily Research | Market Report



Metro $88,818 Renting is $131 Per Month Lower 10,444 1H 2018

Compared with 1H
U.S. Median $61,789 Average Effective Rent vs. Mortgage Payment* g 21% 2014-2017


Metro $482,037 80,000 or 0.9% Annual Growth 4,954 1H 2018

Compared with 1H
U.S. Median $260,016 U.S. 1.2% Annual Growth g 4% 2014-2017

*Mortgage payments based on quarterly median home price with a 30-year fixed-rate conventional mortgage, 90% LTV, taxes, insurance and PMI. **2017-2022 Annualized Rate

Lowest Vacancy Rates 3Q18 Bidding Heightens Metrowide; Buyers

Increasingly Target Cambridge Area
Employment Effective Y-O-Y %
Submarket Basis PointTrends Local Apartment
• Strong property Yield
performance Trends to attract
Rate Rents Change
Metro United States buyersApartment
to Boston’s
Rate marketTreasury
10-Year with theRate
4% of transactions increasing roughly 10 percent during
Year-over-Year Change

the past
8% 12 months.
South Essex County
3% 2.3% -100 $1,813 -0.5%

• Fewer6%sales of higher-priced Class A properties

Plymouth County
2.6% -20 $1,915 5.8% lowered the average price 1.2 percent during the past

four quarters
4% to $308,300 per unit.
Marlborough/Framingham 2.9% -40 $1,813 4.9%
Outlook: Boston’s several major colleges and universities
North Essex County 2.9% -100 $1,672 5.2% will sustain demand for apartments, particularly near
0% Here, properties changed hands upwards
14 15 16 17 18* 00 02 04 06 08 10 12 14 16 18*
3.1% -570 $2,319 6.9% of $500,000 per unit on average.

East Middlesex County 3.3%

Completions -60 $2,289
and Absorption 4.4% Sales Trends
Completions Absorption Sales Price Growth
Lowell 3.4% -20 $1,753 1.9%
Average Price per Unit (000s)

$340 16%
Year-over-Year Growth

Fenway/Brookline/Brighton 3.5% -80 $3,006 2.2%

$255 8%
Units (000s)

3.5% 80 $1,332 2.9%
Counties $170 0%
Waltham/Newton/Lexington 3.7% -10 $2,730 7.4% $85 -8%

Overall Metro 3.5% -50 $2,299 3.8% $0 -16%

14 15 16 17 18* 14 15 16 17 18*

* Trailing 12 months through 3Q18

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Metro United States

Multifamily Research | Market Report


3Q18 Apartment Acquisitions
By Buyer Type Marcus & Millichap Capital Corporation
• Fed pushes overnight lending rate higher, cites economic
Other, 1% Cross-Border, 9%
strength in case for additional increases. The Federal Reserve
increased the federal funds rate by 25 basis points in late September,
Equity Fund
& Institutions, 23%
lifting the Fed funds rate to 2 percent. Remarks from the Fed highlight
a robust economy, spurred by accommodative fiscal stimulus,
while inflation remains broadly in line with expectations. Provided
Private, 63% the economy continues to perform as expected, the Fed is likely to
Listed/REITs, 4%
increase rates in December, as well as up to three times next year.
• Benchmark interest rates, lending costs push higher post-

Fed meeting. After the Federal Reserve lifted overnight rates and
Apartment Mortgage Originations maintained a positive economic outlook, long-term interest rates have
By Lender pushed higher. The 10-Year Treasury yield has quickly traded toward
100% the 3.25 percent range, which is prompting lenders to pass on the
increased cost to borrowers. However, fierce competition for loans is
Percent of Dollar Volume

75% Gov't Agency also leading to some cost absorption among lenders. While greater
Atlanta borrowing
Office: costs may prompt buyers to seek higher cap rates,
Columbus Office:strong
Reg'l/Local Bank
Nat'l Bank/Int'l Bank
economic performance should enable rent growth above inflation. As
Michael Fasano
a result, First Vice
sellers President/Regional
remain committedManager Michael
to higher asking Glass
prices, First Vice
which is Preside
1100 Abernathy Road N.E., Bldg. 500, Suite 600 5005 Rockside Road, Suite 1100
Atlanta, widening
GA 30328 an expectation gap as property performance andOH demand
25% Pvt/Other
Independence, 44131
trends | remain
(678) 808-2700 positive. (216) 264-2000 |
14 15 16 17 18* • The capital markets environment continues to be highly
Office: Government agencies remain the largest source of
Dallas share.
funds, commanding slightly over 50 percent market Office:National
* Through 2Q
Include sales $2.5 million and greater
Craig and
Swanson Vice President/Regional Manager
regional banks control approximately a quarter of theFirstmarket.
Sources: CoStar Group, Inc.; Real Capital Analytics 9600 North Mopac Expressway, Suite 300 Tim Speck Vice President/Di
Austin, TX 78759resides in the high-4 percent realm with5001 maximum leverage
Spring Valley Road,of
Suite 100W
75 percent.
(512) 338-7800 | Dallas,
Portfolio lenders will typically require TX 75244
loan-to-value ratios
(972) 755-5200 | tim.speck@marcusm
National Multi Housing Group closer to 70 percent with interest rates in the low-5 percent range.
Baltimore Office:
The passage of tax reform and rising fiscal stimulus will keep the U.S.
Visit Fort Worth Office:
Drane growing,
Regional underpinning
Manager strong rental demand and supporting
100 E. Pratt St., Suite
a national 2114
apartment vacancy rate of 4.6 percent at the
Kyle end ofVice
Palmer 2018.
John Sebree Baltimore, MD 21202
First Vice President, National Director | National Multi Housing Group 300 Throckmorton Street, Suite 1500
Tel: (202) 536-3700 | (817) 932-6100 | kyle.palmer@marcu
Tel: (312) 327-5417
Boston Office:
Denver Office:
Prepared and edited by
Tim Thompson Regional Manager
100 High Street, Suite 1025 Skyler Cooper Regional Manage
Catherine Zelkowski Boston, MA 02110 1225 17th Street, Suite 1800
Research Analyst | Research Services (617) 896-7200 | Denver, CO 80202
(303) 328-2000 | skyler.cooper@marc
For information on national apartment trends, contact: Charleston Office:
John Chang Benjamin Yelm Regional Manager
Senior Vice President, National Director | Research Services Detroit Office:
151 Meeting Street, Suite 450
Tel: (602) 707-9700
Charleston, SC 29401 Steven Chaben Senior Vice Presid
(843) 952-2222 | Two Towne Square, Suite 450
Southfield, MI 48076
Price: $250
Charlotte Office: (248) 415-2600 | steven.chaben@marc

© Marcus & Millichap 2018 |

Benjamin Yelm Regional Manager
201 South Tryon Street, Suite 1220
Charlotte, NC 28202
(704) 831-4600 |
Fort Lauderdale Office:

Ryan Nee Vice President/Regiona

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete 5900information;
N. Andrewshowever,
Avenue,noSuite 100
representation, warranty or guarantee, express or implied, may be made as to the accuracyArea
Chicago or reliability
Offices:of the information contained herein. Note: Metro-level employment
Ft. Lauderdale, FL 33309
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-
(954) 245-3400 | ryan.nee@marcusm
ed to be a forecast of future events and this is not a guaranty regarding a future event. Matricaria
This is not intended to provide
Senior specific investment
Vice President/Division advice and should not be considered
as investment advice. 333 West Wacker Drive, Suite 200, Chicago, IL 60606
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar (312)Group,
Experian; National Association of Realtors; Moody’s Analytics; Real Capital
Analytics; RealPage, Inc.; TWR/Dodge Pipeline; U.S. Census Bureau Houston Office:
David Bradley Regional Manager | Chicago Downtown Ford Noe Regional Manager
333 West Wacker Drive, Suite 200, Chicago, IL 60606 Three Riverway, Suite 800
(312) 327-5479 | Houston, TX 77056