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Apartment construction booms as rents rise

By Casey Ross
Globe Staff / October 15, 2011

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A burst of apartment construction is sweeping across Boston’s neighborhoods, as several developers are starting towering projects to tap into high demand for rental units while the homeownership market continues to struggle.

In the last few weeks, three builders have started work on complexes that combined will bring more than 850 new apartments to the city over the next couple of years. On Monday, a fourth builder will announce plans to build 295 apartments on a vacant parcel in Chinatown.

The rush of activity is fueled by climbing rents and dropping vacancy rates that make apartment buildings particularly attractive investments in the otherwise dour real estate market. In the quarter that ended Sept. 30, average asking rents in Boston climbed to $1,773, making the city the fourth most expensive rental market in the country, according to Reis Inc., a real estate research firm. Only New York City; Westchester, N.Y.; and Fairfield County, Conn., are more expensive.

Vacancy rates, meanwhile, dropped to 4.2 percent, from 5.5 percent in the same quarter in 2010, according to Reis.

The heightened demand for rentals goes beyond downtown Boston, with large new complexes also going up in Somerville, Cambridge, Cohasset, Weymouth, Andover, and other municipalities. Real estate specialists said the increasing supply will eventually help to moderate prices.

“If I’m a renter, I’m encouraged by this,’’ said Gregory Vasil, chief executive of the Greater Boston Real Estate Board. “It’s been a very long time since we’ve really produced a lot of apartments like this, and the increased supply will help address the problem’’ of ever-rising rents.

For developers, Boston has quickly moved up the list of the nation’s best places to build apartments. It is now ranked third on the Marcus & Millichap National Apartment Index list of the strongest rental markets, up from eighth a year ago.

Behind the trend is persistent weakness in the homeownership market, as the continued soft economy, flat housing values, tougher lending rules, and high number of foreclosures have combined to keep people from buying property. With the home-purchase market so slow, lenders are much more likely to finance apartment buildings rather than condominiums.

Almost every housing project proposed in Boston in the last six months has involved rental units. Just yesterday, the Kensington Investment Co. began construction of 381-unit building on Washington Street. Also moving forward is Avalon Exeter, a 187-unit tower in the Back Bay by AvalonBay Communities Inc., and The Victor, a planned apartment complex that will add 286 units to the northern edge of the Rose Fitzgerald Kennedy Greenway.

Those projects are following an extremely productive third quarter in the city in terms of housing construction. Between July and October, builders started 1,031 new residences in Boston, the vast majority of them apartments. That’s the largest number of housing starts in any quarter since 2006, according to the Boston Redevelopment Authority.

“What it means is that Boston is a city people want to live in and invest in,’’ Mayor Thomas M. Menino said yesterday. “With the projects getting started, we are continuing to reinvent the city.’’

In addition to those underway, a number of other apartment projects are preparing to move forward in Boston soon. Among them are Hayward Place, a 265-unit complex on Washington Street in Downtown Crossing; a 150-unit building along Boylston Street near Fenway Park; and a trio of large projects expected to bring upward of 500 new apartments to the South Boston Waterfront in coming years.

Menino and the Patrick administration are planning an event Monday to celebrate the pending construction of a 20-story housing complex on Hudson Street in Chinatown, on vacant land next to the Interstate 93 onramp.

The builders, New Boston Fund Inc. and the Asian Community Development Corporation, expect to begin construction in the spring. The complex will have 200 market-rate apartments, 95 affordable apartments, a park, and retail stores. The developers also plan to eventually build 50 affordable ownership units.

“This adds much-needed rental housing, and that’s got to be a top priority for us,’’ the governor said in an interview yesterday. His administration is also planning an event for The Victor project on the northern end of the Greenway. “Having these brand new units right downtown, and having many of them devoted to the affordable market, is a really great thing,’’ Patrick said.

Kirk Sykes, an executive leading the Chinatown project, said that demand for apartments has remained strong while supply hasn’t kept pace.

“It’s a perfect storm of pent-up demand and lack of supply,’’ Sykes said. “The housing crisis caused a lot of people to come out of homeownership and into a rental mode.’’

More people are being forced to pursue rentals because they can’t afford higher down payments banks are demanding following the housing crisis. That is putting more pressure on the apartment market, causing average rents to increase by $124 per month, or 7.5 percent, since 2007, according to Reis.

Real estate specialists said the current market is particularly unusual because it is fueling rental construction at all price points, from luxury units in the Back Bay and downtown, to mid-priced apartments in the suburbs, to scores of affordable homes being built in Chinatown and at the Charlesview Residences in Cambridge.

Affordable units are attractive to investors because many come with credits they can use to lower their tax bills. Compared to other investments - such as stocks or government bonds - such tax credits also are seen as producing larger and more reliable returns in strong urban markets.

“A lot of investors are gravitating to Boston because of the rebound in the market here, which is allowing these deals to come together faster,’’ said Gregory Bialecki, Patrick’s top economic development aide. “If you are trying to build rental housing today, banks are lining up to provide financing.’’

Casey Ross can be reached at cross@globe.com.