Boston’s “Buried Treasures” Await Bold Investors
For investors willing to work for it, Beantown rewards are waiting.
Two words will nearly always come up in any discussion covering Boston real estate: “tight” and “expensive.”
Given a decade of population growth and a phenomenal jobs market based in high-demand, recession-resistant sectors like the life sciences that attract young professionals in droves, “tight” and “expensive” seem almost inadequate descriptors by today’s Beantown standards.
But, thanks to a nearly unprecedented rate of growth across the board over the past decade, for investors willing to think creatively and to consider innovative assets, the Boston market has plenty of hidden treasures to leverage as part of a strong investment portfolio.
“If you are an investor, Boston has a track record for being one of the best long-term real estate investments in the nation,” said Marco Santarelli, founder and president of turnkey investment firm Norada Real Estate Investments. “Because of the large number of students and college and university faculty, it is a no-brainer for savvy, long-term investors to invest in a rental property in Boston.”
Still, that strong demand can come with a price where housing affordability is concerned. In the current housing cycle, certain historic trends have not held true when it comes to how that affordability affects population demographics and demand.
“Boston is a high-cost, relatively small market that has historically not grown rapidly because of our geographic barriers,” said Aaron Jodka, an economist and managing director of client services at Colliers International. “High cost-of-living and homeownership has historically caused younger residents to leave for more affordable living environments, but this housing cycle has flipped that.”
Jodka cited a strong economy, new housing and a “phenomenal job market” for Boston’s current status as one of the few major metro areas currently seeing the millennial population expand within the city proper.
This “flip” of historical norms in the Boston housing market has had far-reaching effects on the broader real estate market as well. Not only has the housing stock in the city changed dramatically, noted Jodka, there have been significant real estate-related policy changes as well.
In a city where new construction lagged behind national rates and city planners referred to urbanization “as a trend, rather than a reality,” the current mayor recently launched an initiative intended to add as many as 70,000 housing units in the city proper by 2030.
The move comes not a moment too soon, as much of the single-family residential inventory within the metro area and in the suburbs is holding steady near all-time high prices.
“Median home prices in Boston rose to a new, all-time high of $475,000 in June of this year,” noted Auction.com chief economist Daren Blomquist. “Even though home prices have backed off that high in the last few months, they are still up from a year ago. The data shows a solid housing market in Boston, but one that is not necessarily easy pickings for real estate investors. However, when investors can find those distressed properties, impressive discounts are available.”
Strong Home Sales Leave Conventional Strategies Cold
For the real estate investor who is new to the Boston residential market and does not have an established source of leads on potential deals, the current climate in The Puritan City is not particularly welcoming. Blomquist noted investors are not presently “highly active” in Boston, where cash-sales volumes are well below national average at 19.8% and cash-buyer discounts are hovering around 8.9% in September (compared to nearly twice that just three years ago). He described flipping activity in the area as “tepid” as well, with home-flipping rates just over 3% in September.
“Home flippers may have been scared off by dwindling profits late last year, likely as a result of slowing home price appreciation,” Blomquist said. “However, flipping profits have started to pick back up again as mortgage rates have fallen, which may be good news for investors.”
For investors hoping to acquire single-family residential properties in the Boston area, pickings are likely to remain slim through the end of the year, if not longer, when it comes to distressed properties.
“Discounts are still sizable on bank-owned (REO) properties when those properties can be found. REO median prices were 36% lower than the market median in September,” Blomquist said, pointing out foreclosure-auction discounts are presently even greater, at 59%. However, only about 30 properties are being sold per month at those auctions.
“The current market makes it tough to follow the tried-and-true investor mantra of buying low and selling high,” he said.
Multifamily Represents a Viable Solution
With the single-family residential market offering great rewards to the persistent—but presenting a difficult road for many investors—Boston’s multifamily sector is looking increasingly appealing.
Boston led the country in year-over-year rent growth of 5.1% at the end of the summer according to the Yardi Matrix Multifamily National Report. The young professionals flocking to the area for high-paying jobs in a variety of attractive industry sectors are creating strong demand for luxury units located in areas of the city where owning a car is not necessary.
“A lot of these new residents do not have cars and do not want them,” Blount said. “Fortunately, Boston is a transit-oriented city. Even in the inner suburbs, the communities that have access to reliable train lines are attracting those younger residents who don’t have an interest in owning cars.”
Given that the city has the seventh-highest percentage of pedestrian commuters in the country and boasts the nickname “America’s Walking City,” Boston is a perfect fit—at least in terms of lifestyle preferences—for its younger residents. Many of these individuals attended school in the city and remained after graduation as part of the city’s growing millennial workforce.
“We probably have the highest number of universities and colleges in the country on a per-square-foot basis,” said Blount.
Anecdotal or not, the fact is that Boston is home to nearly three dozen colleges and universities supporting more than 82,000 jobs statewide and contributing nearly $5 billion to the Boston economy.
As more and more of the students in those colleges opt to remain in Boston and often join the burgeoning life science sector in the area, their generation-specific housing preferences are shaping residential multifamily living in Boston.
“We are seeing a lot of mixed-use development in the cities, usually close to transit stops,” Jodka said.
These developments offer a great deal of potential for investors, developers and current residents, because they attract hotel tenants, multifamily residential providers, office tenants and high-end destination retail. Examples include The Hub on Causeway, a 1.87-million-square-foot mixed used development, and the Seaport Neighborhood, which is one of Boston’s youngest neighborhoods and boasts a variety of converted properties, luxury living units and close proximity to many of the city’s technology, advertising, media and information (TAMI) employers.
“About half of all leasing activity in Boston commercial spaces came from the TAMI sector and coworking in 2018,” said Jodka.
Although the beleaguered WeWork is certainly the 800-pound-gorilla in the room in the coworking space in Boston, the economist is not overly concerned about the coworking behemoth’s troubles negatively affecting the broader commercial sector.
“More properties are starting to offer studio and flex products that provide our small business and entrepreneurial populations with more opportunities than have existed before,” he said.
This development comes at a particularly positive juncture for the city’s life-science startups, which often receive millions in investment capital for research and development and “may go from a handful of employees to a team of 100 or more if they are showing promise,” Jodka explained.
“Recently we have seen numerous purchases of properties near the Seaport and hundreds of millions invested in the area to turn it into a life sciences hub. It makes sense: close proximity to transit, near growth in the city, backed by developers and investors with experience in life-science development, and some availability of regional-national partnerships,” he said.
“It’s a very dense cluster of very highly educated people,” Blount added, noting that the city’s rental market is also particularly low-risk and strong because there is little corporate housing available relative to similar markets elsewhere in the country. As a result, medical students, professors and other discipline-related experts may remain in the area in a long-term, temporary capacity.
Beantown’s Ticket to Ride
With its relatively limited options for and growing population of new residents, Boston’s transit-friendly nature and history is key for residents seeking homes and investors seeking profit potential and returns.
Although public transportation in the city often receives a great deal of negative media attention, it still is one of the largest in the country and is the linchpin for most successful future development in the metro area and inner suburbs. Investors willing to watch transit trends and participate in the dialogue that shapes them will be best positioned to leverage Boston’s unique geography.
“There are only so many places you can build, as Boston is surrounded by water. Developers need to have creativity, the ability and willingness to work with the community and the capacity to leverage data and information to find opportunities,” said Diane Danielson, chief operating officer of SVN International, a commercial real estate advisory firm and brokerage based in Boston.
Danielson predicted investors who identify ways to cut construction costs while still meeting housing goals in desirable areas of the city will have the best luck in this market.
“Modular construction, for example, has a lot of potential,” Danielson said. “Regardless, Boston needs investors building cities for people, not cars. You cannot separate the housing issue from the transportation issue. This is why we are seeing proposals like a telecommuting tax credit and congestion pricing. Some employers are offering commuting allowances, but employers still may struggle to retain the bulk of their employees who may not be able to afford to live in the city or commute.”
The message is clear: For an investor with an eye for the next hot rail line or inner-suburban-neighborhood-turned-TAMI-hub, Boston’s tough market is still rife with opportunity. n
Sidebar:
America’s Walking City Takes the Train
In 2017, the city of Boston announced it would take its longstanding nickname, “America’s Walking City,” and make good on the nomenclature. Although Boston already ranked third in the country (trailing only New York and San Francisco) in walkability, the city’s Department of Transportation revealed, via a 77-page report, that by 2030, no city would surpass Boston in walkability. To reach that goal, the city would need about one in five commuters to walk to work in Boston and about one in five fewer commuters would need to drive. In a city where housing prices in highly desirable, walkable areas were already through the roof, this was a tall order.
Simply measuring the population of walking commuters was unrealistic, so the Boston DOT soon began factoring public transportation into the equation.
“Every home in Boston will be within a 10-minute walk of a rail or key bus route, Hubway station and car-share [by 2030],” the department’s plan said.
Given that nearly half of Bostonians already live within a “short walk” to bus and train routes, this made the lofty walkability goal much more realistic. The city also stated it would support mixed-use development in neighborhoods to encourage residents to walk to buy groceries and engage in other everyday activities.
Since the launch of the plan in 2017, Boston residents have jumped on board. Today, Boston’s walk score is 81, and it boasts a transit score of 72 and a bike score of 69.
Residents in the city have responded positively, demonstrating a willingness (and ability) to pay increasingly high rents to access America’s Walking City’s downtown areas. In fact, some of the least-expensive apartments in the downtown area still hover around $3,000 a month for around 600 square feet of space. Fortunately, for those seeking slightly more affordable housing, Boston’s far-reaching public transportation system, which runs under the umbrella of the Massachusetts Bay Transportation Authority (MBTA), ranked second only to Seattle, Washington, in the categories of “Best Overall” and “Accessibility and Convenience” in a recent WalletHub study.
Note: Investors should be aware that Boston transit’s position within the MBTA is a source of some controversy, much of it based on issues related to the sheer volume of people using the system. Before you invest, do some research into the local line’s performance record. In some cases, your “hot deal one block from the train” might not be such a bargain, and all the locals probably know it.
