In recent years, the Greater Boston area has seen a potpourri of property types take center stage, from hotels and office towers to power shopping centers and telecom data facilities. Depending on which asset class is in vogue, developers and investors often find themselves chasing the hot prospect, hoping to cash in before the rest of the crowd takes notice.
In 2001, the category getting the most attention is multi-family housing, specifically apartment-style communities. Concern over the general economy has led many real estate practitioners to seek shelter in the region’s multi-family sector, one which boasts especially solid fundamentals in the Bay State. High occupancy and rent levels, in tandem with perceived barriers to entry, have grabbed the attention of both national and international concerns who see the Hub as a safe haven in which to invest.
“Clearly, there is appetite for multi-family in Boston, more so than I’ve ever seen before,” acknowledged Bradley A.Olson, a real estate advisor who has a stable of overseas clients aiming to invest in the United States. “There is a recognition that this is a market they want to be in.”
A recent survey by Lend Lease Real Estate bears out that notion, with Boston ranked second for multi-family investment in a survey of the country’s top 75 metropolitan markets. The report estimates that Boston has 940,000 renter households, placing it fourth nationally. Meanwhile, existing supply is woefully inadequate, keeping rental rates well above the national average.
The more notable multi-family sales thus far in 2001 include the $22.2 million purchase of a 297-unit portfolio in Quincy, Braintree and Weymouth by a trio of investors; SSR Realty’s $14.3 million acquisition of Yorkshire Court in Shrewsbury, a 15-building, 180-unit complex; and Simeone Residential’s $5.1 million deal for the Heritage Apartments at 50 Maynard St. in Attleboro. The latter property contains 90 units.
Supply and Demand
Domestic pension fund advisors have been aggressively pursuing multi-family in Greater Boston due to a perceived over-allocation of monies in other areas, such as office buildings and hotels. The problem, according to industry observers, is the lack of properties on the block, especially those considered core assets. The region has one of the oldest rental housing stocks in the country, a phenomenon which some cite as an overhang to rent control, while others blame local governments with little interest in allowing apartments in their communities.
“There’s a huge demand [to buy] and not enough supply,” agreed Carl Valeri, president of the Allston-based Hamilton Co. As a result, “there have been very few trades this year.”
Olson concurs with that outlook, calling investment grade multi-family “virtually impossible to find” in Greater Boston. “It’s safe to say that any A-quality multi-family [asset] that came on the market in Boston would attract enormous attention from both German and Dutch investors,” he said.
Olson, who has clients in both countries, said there is a Dutch group emerging which will focus on Class B properties, but added that the group has yet to scope out any properties in the Hub. One of the area’s most notable multi-family deals, the $108 million sale of Museum Towers in Cambridge three years ago, came primarily from Dutch funding, Olson noted. Germany based TMW is also said to be focusing in on apartment deals.
Buy or Build
Hamilton is pursuing potential multi-family acquisitions, said Valeri, and is developing new supply whenever the opportunity presents itself. The company, for example, is preparing to add 20 units to the 220 it already owns at the Westgate Apartments in Woburn. For the most part, however, Valeri said the cost of land and other factors make it nearly impossible for local developers to build new apartments, with that opportunity left up to national players who have the patient money needed to make such projects profitable over time.
“The numbers still don’t work,” said Valeri, with the Woburn development doable only because Hamilton already owns the land. Hamilton is, however, constructing several condominium projects.
Even with other well-heeled investors chasing multi-family, Valeri said it is still the preferred approach vehicle to buy existing properties versus new construction. Permitting lead times, land costs and marketing expenses make acquisition a better bet, Valeri said. One deal his company is pursuing north of Boston is being offered at $140,000 per unit, but Valeri said it would cost upwards of $200,000 per unit to replicate the property.
“If you can buy for less than it costs to construct, why not do it?” Valeri said. While decidedly down from the estimated 10,000 apartments Hamilton held in Greater Boston during the 1980s when founder Harold Brown was Boston’s top landlord, the company has increased its holdings significantly since 1995, mostly through acquisitions. At least 1,500 of the firm’s 3,280 units have been added in the past six years, Valeri estimated.
As Valeri mentioned, Greater Boston has seen an influx of national companies in recent years, with such major players as Charles E. Smith, Equity Residential and JPI Properties aggressively advancing on the region. Colorado-based Archstone Communities Trust recently purchased the Northgate Heights apartment complex in Waltham for $28 million, just the latest in several apartment complexes the real estate investment trust has acquired in the MetroWest market since 1999.
The firm which has made the greatest strides locally, however, would appear to be AvalonBay Communities, which has pursued a combination of acquisition and new construction to bolster its presence in the area. Along with buying the 780-unit residential portion of the Prudential Center in Boston three years ago, AvalonBay is currently among the bidders for Hayward Place, a prime parcel in downtown Boston that the Boston Redevelopment Authority is looking to sell. AvalonBay is proposing a mixed-use facility that would include 300 luxury apartment units.
AvalonBay principal Scott Dale acknowledged that the cost of construction locally “keeps a lot of the smaller players out of the business,” especially given the long lead time it takes to get a project from inception to completion. In some instances, it has taken AvalonBay upwards of four years to gain development approvals. “Smaller companies just may not be able to see that through to the end,” Dale said.
But staying power and a willingness to work cooperatively with communities has proven a solid combination for AvalonBay, which has done multiple projects in several cities and towns. The firm has three developments in Quincy, recently began a second in Wilmington and will break ground on a second complex this week in Westborough. Through the state’s powerful Chapter 40B law which requires communities to approve multi-family construction if it meets certain income guidelines, some developers have been more antagonistic in their dealings, but AvalonBay Vice President William M. McLaughlin argued that it is a short-sighted approach to take.
“It puts you in a contentious position,” he said. “You really want to try and work with the town.”
AvalonBay’s foray into Greater Boston dates back to 1989 during its incarnation as Trammell Crow Residential. The firm later became Avalon Properties and AvalonBay Communities in 1998 following the merger with a California company. The company got in ahead of the curve, McLaughlin said, because it believed early on in the Hub’s diverse economy, something which at the time was “a well-kept secret.”
“We had a great headstart by being here,” he said. Now, the firm appears to be everywhere, having recently completed a luxury development in Hull and on the verge of beginning construction of a 294-unit complex on Needham Street in Newton. In all, AvalonBay has some 3,500 apartments in Massachusetts, said McLaughlin. The REIT has 40,000 units across the country, including about 1,000 that are being added this year in the Bay State.
“I think we’ve got as much in the pipeline here as we do anywhere,” McLaughlin said.
AvalonBay employs on-site supervisors and project managers to ensure consistency of service, with Rob Salkovitz among those handling the latter position. At the firm’s new Wilmington site last week, Salkovitz provided a detailed glimpse of how the process is streamlined to allow construction to be done as quickly as possible while still ensuring quality. Materials are often assembled off-site and delivered for immediate application, for example, while AvalonBay tends to use basic prototype designs to provide consistency in their developments.
Whereas some national players tend to serve as either merchant builders or will typically sell their assets soon after completion. AvalonBay’s approach is long-term ownership, something which requires greater attention to detail, according to McLaughlin.
