Boston’s multifamily rental market has gone through unprecedented changes this cycle. The recovery following the Great Recession has brought on levels of new construction Boston has rarely seen, expanding the urban housing market by tens of thousands of units. With a majority of these new rental units considered “luxury housing,” it’s no surprise the city’s multifamily landscape is facing a fundamental transformation. Digging further into the data on Boston’s evolving high-end rental market, several interesting trends arise. Average unit sizes are down, rents have climbed to near-astronomical levels, and yet, demand remains robust amidst rising population levels and a growing labor force. While the luxury market in Boston may have still has some legs, concerns of overbuilding, aging Millennials, stagnant wage growth and the length of this current economic cycle are lingering.

Luxury, Defined

What is a luxury apartment building anyway? Using subjective attributes, like the types of amenities or styles of fixtures and finishes, are likely helpful in assessing Boston’s high-end rental market. However, for consistency and accuracy, this article’s analysis is based on Yardi Matrix’s definition and classification system. High-end or luxury rental properties are those that are characterized as Discretionary (Class A+/A) and High Mid-Range (Class A-/B+).

As such, there are nearly 24,000 units across 99 properties in Boston and Cambridge that fall within these categories. With an average age of 15 years, most of the buildings were constructed during the last two decades, and average asking rents surpassed $4/SF in early 2018. According to data pulled from The CoStar Group, developers have focused on single-person and/or Dual Income, No Kids (aka DINK) households. Roughly 65% of Boston’s high-end units are either studios or 1-bedroom apartments. On the other hand, 3-bedroom units account for only 4% of the total luxury inventory here.  

Even though renters are willing to pay a premium to live the high life, they will have to do so in a smaller footprint. In fact, the average unit size in this segment of the marketplace has been trending downward for the majority of the last 18 years. Since 2000, the average unit size declined by 11%; going from 975 SF to just 868 SF in the second quarter of 2018. Several of the area’s newest apartment buildings boast well-below average unit sizes. For instance, the average unit size ranges from 583 SF to 683 SF in the Proto (Cambridge), Trac 75 (Allston) and Nova (Brighton). Shrinking personal space has been somewhat offset by increasing communal space and amenities in many recent developments.

Boston’s high-end rental market is highly concentrated in the South End, Fenway, Seaport, Back Bay, North Station, and East Cambridge. As development has moved out from the city center, pockets of luxury product have popped up in Alewife, Allston/Brighton and East Boston as well. All of these neighborhoods boast proximity to entertainment, nightlife, job centers and most importantly public transit routes.

As rental housing becomes more expensive and construction costs continue to rise, development may continue to push into more outlying neighborhoods within Boston and Cambridge as well as Inner Suburban locales like Somerville and Revere.

Market Fundamentals

Current vacancy rates in Boston’s luxury market have fallen to 8.6% in the second quarter of 2018. This is a marked difference from the peak rates seen in 2014-2015 when new deliveries were at their height. Some of the city’s newest projects are still in lease-up, but strong labor force growth throughout the Greater Boston area during the first half of 2018 is one key factor driving rental demand here. If the labor markets remain tight and Boston keeps adding to the local payrolls, vacancies in high-end apartment properties could decline further. Steady levels of new construction, however, will likely curtail any major fundamental improvements.  

Demand-side fundamentals have been healthy in Boston’s luxury rental market. Rapidly rising rents in this segment of the market have likely pushed some renters outside of the core urban neighborhoods, but record-setting growth in the local labor force during the first half of 2018 has risen apartment demand across Greater Boston. The urban core’s high-end market has benefitted from this brisk expansion, which reached 5% year-to-date in 2018. A resurgence in urban living and working has been a boon for Boston this cycle, and as more people have entered the labor force the need for housing has increased. That said, maintaining this pace of growth, in the long run, will be difficult.  

New construction has dominated Boston’s multifamily narrative for the bulk of the last five years. In the aftermath of the housing crisis in 2009-2010, foreclosures and bankruptcies led to rapidly declining homeownership rates. Rental housing demand surged as a result. In response, supply in Boston’s urban core swelled by 92%, adding almost 19,000 units to the rental inventory. The lion’s share of development took place in the last 8 years, with total inventory expanding by 50% from 2010 to 2018. While the number of units under construction has tapered in recent years, activity remains solid in Boston and Cambridge. There are close to 5,000 units underway as of the second quarter — most of which are expected to come online in 2019 or 2020.

Rental Rate Trends

Invariably stronger demand for rental housing in Boston and Cambridge has led to higher asking rents in the apartment market. The area’s recent building boom has also been putting upward pressure on lease rates in the urban markets. According to data from the CoStar Group, average asking rents for high-end rental properties ended the second quarter of 2018 at $4.13/SF. This puts rents 40% above their cyclical low of $2.96/SF, which occurred in early 2010. While effective rents experienced a similar run-up, expanding rates began to diverge in late-2014 as developers ramped up the delivery pipeline in Boston.    

The delta between asking rents and effective rents in Boston’s luxury market averaged 2.4% from the first quarter of 2015 to the first quarter of 2018, and the percentage of properties offering concessions nearing 3% at the end of 2017. As previously discussed, outsized gains in the local labor market have driven up rental demand; allowing this gap and the percent offering concessions to contract considerably.

It is difficult to discern any long-term trends from just two-quarters of data. Although the near-term outlook remains strong for Boston’s economy, maintaining the levels of growth seen in recent quarters will be difficult. Moreover, several thousand new units are slated to hit the market in the next 12-24 months, which will ultimately weigh on asking rents and likely push up concessions.  

Final Thoughts

Boston’s luxury rental market is more dynamic than ever. Demand bounced back as a result of considerable growth in the local labor force, while developers are adding thousands of new units to inventory over the next two years. Recent improvements in market fundamentals may not be sustainable, both overall Boston’s positive economic story bodes well for rental demand in the near term. Without any significant wage growth, however, many renters will likely get priced out of the market. In this case, expect demand for Class B assets and areas outside of the urban core to rise.