As you all know, Boston has seen a huge boom in apartment building construction lately. Take a look toward the sky in any neighborhood and you will see cranes, cranes, cranes. This is awesome for the city, however, the sudden influx of new inventory laden with high class amenities is creating a situation where building owners are competing for tenants in cut-throat fashion.
Over the long term, the statistical data shows that the units will be absorbed and there is definite need for housing, but in the short term this is going to have an impact on the rental market. To get a better handle on the effect this is going to have, we got a group of office owners, rental agents, sales brokers and some developers together to discuss the situation and here was the consensus:
We have seen this before, and there is no reason to be overly worried. What is happening is that the larger buildings are offering 1 or 2 months of free rent or paying fees to force occupancy vs. letting the market forces fill the building over time. The majority of the units are typically 2 beds renting for a target market rent of $4,500 or so. When you factor in the concessions, it brings them down to mid 3’s and becomes direct competition for traditional higher end condo rentals or brownstone units.
The one beds seem to be less prevalent in the larger buildings unit mix and thus the effect wont be as great, but the break point there is estimated around $3,000. Additionally, all this inventory will take at least a year to get absorbed and then there will be another surge in vacancy as the tenants who enjoyed discounted rent in a luxury building will not all be able to afford the mark to market that will be coming in a year.
That said, what can landlords with more traditional brownstone rental units do?
First and foremost, the huge rent increases of the last few years are over. Your rent may even go down 5% or so if you got really aggressive on increases on the last rental term. Secondly, when you do have a unit come to market, it is going to take more showings to get it rented, but it will rent. Third, you will be best suited to take a good tenant at a slightly lower rent when then come. Fourth, you need to be savvy; pay attention to what concessions are being offered.
In conclusion, this inventory coming to market is going to have an effect, but the overall Boston rental market is still very strong, just not an inferno as it was the last two years. Stay informed, talk to professional rental agents, and most importantly, stay ahead of the market. One bed rentals up to 3k or so shouldn’t be effected drastically, but two bed rentals in the 3500-4500 range will be. Also, when looking at new assets for purchase, be very conservative in your underwriting for current rent and future rent escalation.
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