First Half Review – In With a Bang, Out With a Whimper
Note: This article first appeared in Banker and Tradesman.
As we close out the first half of 2022, the Batterymarch Back Bay Index© (BBBI) registered a year-to-date price gain of 8.9% on a 31% decline in transaction volume. This compares to a modest 2.6% price gain on a 24% increase in transaction volume for calendar year 2021. For more on the BBBI and our methodology see here.
The year got off to a strong start and we even had a scattering of suburban-esque bidding wars, predominantly in the South End. The market strength was well illustrated with the lightning quick sellout of Hexagon Properties’ nine unit redevelopment at 29 Commonwealth Avenue in the Back Bay. Prices there ranged from $8.5 million to $21.75 million. The project’s average selling price per square foot came in at an eye opening $3,200 with an average seven days on market – you’d think they were giving them away.
It hasn’t been all fun and games for every developer. In stark contrast to Hexagon’s success, over on the back side of Beacon Hill the developer of The Archer recently slashed some prices by 8-10%. By our calculation, only 29 of the 62 units have sold after three years of marketing.
Activity remains brisk in the Seaport with 46 condominiums changing hands year-to-date. The hot Seaport property is still 22 Liberty Drive where three units sold quickly fetching an average $2,641 per square foot. The bulk of the Seaport activity has been driven by a seemingly endless supply of new units at the Echelon.
Overall we’d chalk up the strong first half price performance to three main factors: 1) the backward nature of real estate sales – many first quarter closings were deals negotiated in late 2021 before rates moved up, 2) pent-up demand coming off the seasonally slow winter, and 3) buyers scrambling to lock in low rate mortgages.
The 31% decline in transaction volume in the BBBI is cause for concern. Currently, Back Bay condominium inventory is about 20% above 2019 pre-pandemic levels, and units that have gone pending are trailing 2019 by 13%. Add to that widespread price reductions (across all price points) and you’re looking at a meaningful deterioration in market liquidity.
The culprit behind the market slowdown is clearly higher interest rates. Conforming 30 year mortgage rates have spiked to 5.5% from around 3% at the beginning of the year. We hear banter from the realtor community that 5.5% mortgage rates are still historically low. That is true in the very long historical picture, but it should be recognized that mortgage rates are at a 14-year high.
Downtown Outlook – Don’t Fight the Fed
It’s clear that the cheap money Goldilocks narrative for real estate is shifting; market sentiment can be fickle and turn quickly. Inflation-driven higher interest rates are weighing on valuations. We’re concerned about the ramifications of quantitative tightening as the Federal Reserve begins to unwind its $9 trillion balance sheet. We’re in uncharted waters on that front.
We’re advising clients to be wary of new developments with high investor activity. As mortgage rates declined over the last decade, the stock of downtown luxury condominiums exploded. A good old fashioned interest rate cycle will stress test the values in these developments and may shake out speculators.
We’re keeping a close eye on three high profile luxury developments that are currently in full marketing mode – the St.Regis (Seaport – 114 units), Winthrop Center (Downtown – 314 units), and Raffles (Back Bay – 146 units). If JP Morgan’s CEO Jamie Diamond’s prediction for an “economic hurricane” materializes, these developers could be forced to make attractive deals.
We continue to recommend that buyers focus on reasonably priced, good quality properties in traditional blue chip locations. The good news is that the downtown market didn’t get caught up in the pandemic-driven real estate feeding frenzy, and that should cushion any downside. Sellers should recognize the Fed-induced liquidity squeeze and resist the temptation to overprice their properties – don’t fight the Fed.
About Batterymarch Group LLC – Batterymarch Group is an independent full service real estate brokerage and advisory firm focused on the downtown Boston high-end residential market. We represent both sellers and buyers with a sharp focus on valuation. We also offer sub-advisory and owner’s representation services to financial institutions, family offices, and trustees.
About Andrew Haigney – A 25 year Wall Street veteran, Andrew held senior positions at leading global investment banking institutions where he routinely valued and negotiated complex securities transactions on behalf of institutional clients. Andrew has been an outspoken advocate of a universal fiduciary standard. In founding Batterymarch Group, Andrew brings that same discipline and passion to the real estate brokerage.