Metropolitan Properties of America recently backed out of a deal to purchase the 367-unit Constitution Quarters in Charlestown.
After enjoying huge popularity as an asset class in 2001, the multifamily market is showing signs of cooling off as the New Year begins.
According to industry sources, two high-profile Boston deals have cratered, with Metropolitan Properties of America backing out of an agreement to buy Constitution Quarters in Charlestown while JPI Properties has quashed plans to take on a 630-unit apartment development in South Boston.
Cathartes principal Robert Maloney confirmed last week that JPI has informed Cathartes and partner AEW Capital Management it is abandoning plans to develop the $140 million South Boston project. Maloney said officials of the Texas-based firm cited the recent economic slowdown, which has sharply increased apartment vacancies and cut rental rates throughout the region. Cathartes remains upbeat about the prospects for the project’s success, said Maloney, explaining that the company is mulling over its options.
We are reassessing right now and trying to figure out what is going on with market rental rates and construction costs, but our best bet might be to move forward and build it ourselves, he said, adding, We think it’s a very good place to be long-term.
JPI apparently thought so at one point, reportedly agreeing to pay about $40,000 per developable unit to acquire the development rights, or $27 million.
In the Charlestown sale, MPA had the 367-unit Constitution Quarters under agreement for an extended period before opting to pull out in the final moments. The market went south and they just couldn’t keep it together any longer, one source said of the negotiations. It just didn’t have the same value anymore.
MPA had been planning to pay an estimated $95 million for Constitution Quarters, one source said. The source added that an environmental problem delayed discussions, and said by the time the matter was finally resolved, the economic slide had done its damage. Calls to MPA Chief Executive Officer Jeffrey Cohen were not returned by press time, while Constitution Quarters’ owner also did not respond to inquiries.
Multifamily specialists agree that conditions have changed dramatically since last year. Layoffs in the high-tech and financial services sectors have created sizeable vacancies in the apartment stock, said Jonathan Close of Nordic Properties. There has been a pronounced austerity movement, he said, with some people migrating to cheaper apartments, others doubling up with roommates and still more moving back home to ride out the economic turmoil.
People are very price-conscious, said Close. They don’t care about amenities anymore; they care about price. Rates have been shaved as much as $500 to $600 per month in order to attract tenants, said Close. Nordic began noticing a slowdown in August, he said, and conditions have continued to deteriorate.
‘Peaks and Valleys’
On the demand side, Close said it is unlikely there will be much improvement in the first quarter because that is traditionally an inactive period for renting in Massachusetts. The big question is, ‘Is this a seasonal slowdown or an economic slowdown?’ he said, adding, We’ll know in April what direction the market is headed in.
Even with the recent struggles, Close said investors continue to flock to multifamily opportunities, especially in the Bay State. For the most part, such buyers consider the area to have solid fundamentals, Close said.
They know you are going to get your peaks and valleys, but in the long run you are going to outperform every market in the country because Boston has a problem with supply, he said. It is still a very hot market.
The biggest challenge has been a lack of multifamily product to sell, said Close, adding that he expects it will be difficult to rustle up apartment properties in the coming year. Transactions will still be on the thin side, he said.
Among the active players is Lincoln Property Co.’s residential division, with the firm currently in permitting for a 301-unit complex in Waltham and also angling to purchase the Hayward Place parcel in downtown Boston, upon which Lincoln and partner Equity Residential hope to develop approximately 340 luxury apartments.
Lincoln’s local partner, John Noone, said he remains optimistic about Massachusetts for multifamily investments. Any deals that have failed were improperly priced, he maintained, and not a function of overall investor trepidation.
When a market slows down, people are not willing to pay the premiums they were before, he said. Boston is still a favorable market and it will continue to be. There just needs to be a more rational approach to pricing.
Noone seconded Close’s observation that firms such as Lincoln do not see the recent vacancy increases and lower rents as indicative that multifamily properties in Massachusetts are headed for trouble. If his company is designated as the developer of Hayward Place by the city of Boston, Lincoln will push ahead with its plans, Noone pledged, noting that the permitting process will provide ample distance between the current malaise and the project’s opening.
We still think it is very viable and our partner, Equity Residential, also thinks it is still viable, Noone said. It’s a great location.
