MARKET BREAKDOWN
REGIONAL SPOTLIGHT: BOSTON, MA
emphasized that real estate investors in the Boston area need a little perspective when it comes to square footage. “I am working with developers who have been sitting on these properties and know that now is the time to build, but they needed some guidance on what and how to build,” he explained, noting that the area’s dearth of affordable housing can be a huge advantage for developers seeking capital from public funds for their projects. “We are able to erect developments with lots of units that rent for $2,400 or more a month but that have relatively low square footage,” he explained. “A luxury unit might be as small as 900 square feet in the right area, but you have to have the relationships to invest there.” INVESTING ON HIGH ALERT Investors already active in the Boston housing market may feel that they have the world on a string, and, at present, it’s likely the case. However, Boston is perfectly situated to lead the U.S. population of extremely hot housing markets into 2018 either by continuing to rise in value (if inventory issues and affordability are resolved) or by leveling off in value, a trend that could, tempo- rarily, cause prices to fall if homeowners react en masse by trying to sell before the downswing. This latter scenario, while embraced in late January by news stations eagerly posting headlines such as “Home Values Could Fall as Much as 14 Percent!” seems relatively unlikely simply because Boston is so inherently attractive as a place to live. However, since the market is likely to fluctuate or, at a minimum, slow over the next few months, investors should be alert to potential factors that might indicate a pending change in the market temperature. On a local level, this can mean practices such as watching volumes of building permits applied for and approved or
monitoring the number of jobs added monthly in the market. “A place adding both employment opportunities and affordable living oppor- tunities will usually be in a good place eco- nomically, and that is good for a real estate investor,” said Cisterna. “You want light scarcity of housing, but not a total lack of inventory. A market that is not building enough homes is looking at continued appreciation, low vacancies, and continued appreciation in rents, but it also is volatile if the inventory is too low or nonexistent.” Investors should also look outward for threats to the national economy. This applies to real estate investors in Boston and anywhere else in the U.S. “At this point, we don’t see any fatal flaws in- herent to the [national] housing market (such as the subprime, no-doc lending of 10 years ago),” observed ATTOM Data Solutions senior vice president Daren Blomquist. “The last housing boom was a house of cards ready to fall at the slight- est disturbance. The boom of the last five years is built on a much more solid foundation. The more likely threat to any housing boom [today] is some external shock, such as an economic recession or global geopolitical instability.” A real estate investor willing to monitor their market closely and build relationships within that market to strengthen their own strategic positions will likely find opportuni- ty in any market, including Boston. Boston, however, unlike other “hot” markets in the U.S. right now, offers investors on high alert the opportunity to gain access to investment opportunities before the heated cycle is complete. “Just be alert and keep informed,” recommended Cisterna. “Even if you do not jump into a hot market today, you always want to pay attention. There are going to be opportunities when the market shifts, and if it corrects and hits the floor.” •
HIGHER EDUCATION IN BOSTON B oston, Massachusetts is home to dozens of the most prestigious institutions of higher learning in the country. In total, there are eight research universi- ties, 22 special-focus institutions, and 49 nonprofit educational organizations. 51 are recognized by the U.S. Department of Education, and 47 are accredited by the New England Association of Schools and Colleges, which is the oldest regional accrediting body in the United States. Below, find a cross-section of these institutions: • Boston College
analysts predicted much lower apprecia- tion in Boston in 2018 compared to 2017. “Obviously, a big part of what drives pric- es is supply and demand, but no market can sustain that growth if the right type of inventory is not available,” he said. “Investors need to ask themselves: Can prices continue to escalate if no new houses are being built even if new jobs are being created rapidly? Only if there are enough high earners [present] to continue to buoy the prices. The answer is typically ‘no,’ because as prices continue to escalate, the pool of potential buyers gets smaller and smaller. That means if you are not working in the right market, with the right properties, using the right strategies, your calculations are not going to add up when things start to slow down, and given the cyclical nature of real estate, at some point, that slow-down should occur.” LOOKING IN ALL THE RIGHT PLACES To accommodate the requirement that an investor be “in the right market, with the right properties, using the right strategies” in Boston, real estate inves- tors should look, as Seymour suggested, where others are not looking. Cisterna noted this could include somewhere many would consider almost counterin- tuitive: inside Boston proper. “If you are trying to get the highest return possible, you are simply not going to accomplish that with a property that is 10 to 15 years old,” he pointed out, noting
that many of the homes in the cities surrounding Boston are much newer than properties inside the city limits. As the city spread outward, homes were built to accommodate the needs of the growing population; frequently the homes on the outer edges of any metro area will be new- er than those nearer the city center. Boston, however, represents an extreme example of this situation. It is one of the oldest cities in the United States, with a founding date of 1630. “Obviously, the metro inventory isn’t that old, but Boston does have some of the oldest housing stock in the country, and it’s in the older housing stock that fix-and-flippers can find a lot of value,” said Cisterna. “You don’t want to flip a house where all it needs is a coat of paint and new carpet because in a market like Boston, that does not give you enough profit margin. Investors looking to flip should be pushing into older markets where the majority of the houses were built before 1970, where a significant remodel will bring the house up to today’s standards along with its price tag.” Seymour agreed with the idea that add- ing huge value is important, noting that he is seeing a lot of opportunity in Boston outside of simple residential housing. “We purchase single-family properties, but we also look for distressed and outdated multifamily units,” he said. “We’re always hunting the deals, and finding them right now can be a challenge. Investors need to be willing to work on all ends of the scale. I just did a small, single-family ranch that was 1,000 square feet, a three-unit asset
with 4,000 square feet, and we’re also looking at some larger multifamily units with other investors.” Seymour added, “Even with crazy price increases like the ones we saw last year in the Boston marketplace, some of the properties are still not on par. That means that some homeowners are still sitting on their first and second mortgages and their home equity lines of credit. When interest rates rise or the economy hits a bump, they are going to go into default. That means opportunity for investors to help them resolve that problem, but it also means, in my opinion, that the Boston market’s run up has a shelf life that could be nearing its end. I think in the next 18 to 24 months (at the outside), we’re going to see some signs of a correction.” To accommodate for that outlook, Seymour keeps his fix-and- flip project timelines under six months and tends to avoid properties with longer turnaround times unless holding them also fits into his strategy. Carpenter, on the other hand, sees large, new projects in the region south of Boston as a good route, if you can get in on the ac- tion. The key to success using this strategy, he says, is to invest in multifamily properties instead of single-family residences. “We did two major multifamily developments in 2017, and have four more in 2018 already underway. They’re all south of Boston on the South Shore," he said confidently. Carpenter’s projects come with a big advantage for him, however: He has a working relationship with developers who owned property in the area already. He also
• Boston University* • Cambridge College • Gordon-Conwell Theological Seminary • Harvard University* • Massachusetts Institute of Technology (MIT) • New England Conservatory • Tufts University* • New England College of Business & Finance
*also hosts a highly regarded school of medicine.
Carole VanSickle Ellis is the editor of Think Realty Magazine. She can be reached at cellis@thinkrealty.com.
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