Multi-Family Market – Is the Smart Money Getting Out?

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Multi-Family Market – Is the Smart Money Getting Out?

“In the last two years, developers have been on a feeding frenzy with their snouts stuck in the multi-family trough.”

Property Spotlight – On the Market

  • 433 Marlborough St. units 1 & PH – A Multi-Family Flip in the Hinterlands  – Unit 1 Offered at $3.599 Million ($2,311/sf), Unit PH Offered at $6.99 Million ($1,903/sf)

Well Bought/Well Sold

  • 1 Franklin Street, unit 5503  Are Downtown High-Rise Values Tumbling? – Well Bought
  • 52 Beacon St., unit 1 & unit PH  – Developer Blinks on Beacon Street – Well Bought 

Multi-Family Market – Is the Smart Money Getting Out?

The Back Bay multi-family market has been on fire over the last 24 months. According to MLS data, the average number of multi-family properties offered for sale in the last two years is up 59% from the average of the previous three years. The number of these properties that sold or have contracts is up 47% for the same time period. What’s going on – is the smart money getting out?

Pandemic-driven artificially low interest rates drove the value of these properties to the moon. Capitalization rates, or cap rates, have plummeted. (Without getting too technical, the cap rate is the net operating income that the property generates divided into the value of the property.  It’s a measure of the return on your investment.) By our calculation, many of these Back Bay properties have 0% cap rates.

Back Bay – Gut Renovation

At current valuations, these buildings are no longer viable to operate as rental properties. Savvy owners recognize this and are willing to sell to the highest bidder – enter developers. With consumers willing to pay upwards of $2,000 – $3,000 per square foot for a newly renovated downtown condominium, there’s big money to be made in the flipping world.

The biggest problem developers have had in recent years has been getting their hands on the properties to renovate. The competition between developers in the Back Bay to buy these properties has been fierce in recent years. This has resulted in ridiculously high prices being paid for derelict buildings. In the last two years, developers have been on a feeding frenzy with their snouts stuck in the multi-family trough.

Buyers Take Note

So what does this mean for condominium buyers? Based on the number of multi-family buildings changing hands, we’d estimate that over 110 “new construction” high-end condominiums are in the Back Bay pipeline. Keep in mind that not all multi-family sales make it into MLS, so the actual number of units in the pipeline is likely meaningfully higher.

While 110 units of new supply may not seem significant, it should be recognized that in the last 12 months, 114 condominium units sold for over $2.0 million (roughly the average selling price in the Back Bay). So yes, this additional supply will be meaningful, even more so when put in the context of the 600 high-end units hitting the market in the downtown luxury corridor (see “The 600 – Ready or Not, Here They Come!“). 

Property Spotlight

Batterymarch Group is focused on buyer representation, so the highlighted listings are not ours. These are our opinions, so take them with a grain of salt. We’re happy to set up showings of these properties, offer our valuation analysis, and assist with preliminary renovation budgets when needed.

433 Marlborough St. units 1 & PH – A Multi-Family Flip in the Hinterlands  – Unit 1 Offered at $3.599 Million ($2,311/sf), Unit PH Offered at $6.99 Million ($1,903/sf)

433 Marlborough (Bunting c’42)

Sticking with our multi-family condominium conversion theme, we’re highlighting 433 Marlborough Street where two freshly renovated units hit the market this week. By way of background, the developer bought the property in February of 2021 for $3.625 million (the asking price was $2.975 million). The combined square footage for the two units now offered is 5,985, so the developer effectively paid $605/sf.

Unit 1

Unit 1, a 2,300 square foot three bedroom, occupies the first floor and basement of the building. The unit includes private outdoor space and two tandem parking spaces. Readers of our work know that we’re normally pretty negative about basement level living areas. We were pleasantly surprised by unusually high ceilings, and the street facing windows seemed larger than typical basement windows. Importantly, the primary suite is on the upper level, so at least the person writing the checks will be spared the musty basement odors.

433 – Under Construction

Unit PH

The 3,674 square foot upper level triplex has four bedrooms and a great walk out private terrace. The unit comes with two parking spaces, one garage and one outdoor. Overall it’s a very nice unit, but there are a few things that we think would be irritating to live with. The coat closet at the main point of entry seemed totally inadequate for a four bedroom apartment. This may seem picky, but when you’re spending nearly $7.0 million to be in the last block in the Back Bay, you’re allowed to be picky. 

We also have a problem with the elevator setup. The elevator, which is private to unit PH, doesn’t stop at the first floor – the main entrance. The elevator can only be accessed through the garage in the rear alley in the basement. This is ok when you’re unloading things from your car, but in our view not being able to access the elevator at the main entrance on Marlborough Street makes it a quasi walk-up.

Both of the units are very nice with well executed high quality finishes – better than average for a spec redevelopment. The biggest hurdle we see is that the property is located on the west side of Mass Ave, what we consider the hinterlands of the Back Bay. It’s not a bad location, but it’s not for everyone.

The valuation seems pretty rich to us; between both units the developer is looking to get $1,769/sf out of the project.  When you back out the property cost, you have about $1,164/sf to cover the cost of the renovation and the developer’s profit. It seems like the developer is going to really ring the register on this one – bid cautiously!

433 Marlborough Street unit 1 & unit PH are offered by Campion & Company.

Well Bought/Well Sold

1 Franklin Street, unit 5503  Are Downtown High-Rise Values Tumbling? – Well Bought

1 Franklin Street

Unit 5503, a 2,773 square foot three bedroom unit at 1 Franklin Street sold for $4.6 million ($1,658/sf), a 23% discount from the original asking price of $5.99 million. These upper level units are pretty dramatic. Perched on the 55th floor with 12 foot ceilings and walls of glass, the views are amazing.

Public records indicate that the unit was conveyed to the MIT Real Estate Foundation, presumably as a charitable gift. We highlight this because institutions tend to be more aggressive when selling assets compared to typical homeowners. The upper level units at 1 Franklin have been fetching just under $1,900/sf, so this sale is about a 13% discount.

We’ve been concerned about how values will hold up at new developments. It’s worth highlighting that this unit was bought new in 2016 for $5.75 million. According to the marketing material, the owner made additional improvements to the tune of a half a million dollars. That implies a decline in value, net after transaction fees, of roughly $1.85 million, or about 30% in six years.

It remains to be seen if Downtown Crossing can get its pre-pandemic mojo back, so where values go from here is anyone’s guess. In the context of today’s market, this was a fair deal for both parties. With the glut of new downtown developments, MIT made the right move by hitting the bid. We’re giving the advantage to the buyer. They got a great unit at a market correct price, it was – Well Bought.

52 Beacon St., unit 1 & unit PH  – Developer Blinks on Beacon Street – Well Bought

52 Beacon St. – Beacon Hill

Unit 1 and unit PH at 52 Beacon Street, a new re-development, changed hands last week. Unit 1, a 4,084 square foot three bedroom lower level triplex, sold for $3.5 million ($857/sf). The penthouse, a 5,438 square foot four bedroom triplex, traded for $7.7 million ($1,415/sf).

Both unit 1 and unit PH traded as steep discounts to their original asking prices after an extended period on the market, 29% and 19% respectively. The discounts reflect what we see as flawed layouts. There’s a lot of “deep space” (see “Deep Space – The Rockefeller 27 Foot Rule“), and the rear windows are awkwardly close to another building. The building itself is nice, but definitely won’t win any Beacon Hill architectural awards.

On the positive side, this is new construction in a prime Beacon Hill location. The units are spacious and they both have good functional outdoor space. There isn’t any parking, but being so close to the Boston Common Parking Garage, it almost doesn’t matter.

As this developer learned the hard way, things like quirky layouts lead to liquidity problems. Even with the quirks and the possible lack of future liquidity, the valuation and location win the day on these deals. Both buyers did well, they were – Well Bought.

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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 real estate brokerage.

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