Wednesday, November 3, 2010

NEW DEVELOPMENT: Developers tap into demand for apartments. Thousands of units planned

A slowdown in financing for office towers and high-rise condominiums in Boston is prompting a dramatic increase in proposals from developers to build apartment complexes instead, with more than a dozen projects totaling about $1 billion now pending.

The proposals — some of which still need financing — represent thousands of additional rental units across the city, where a shortage of apartments has led to increased rents.

“This need has been building for some time,’’ said Gregory Vasil, chief executive of the Greater Boston Real Estate Board, a trade group. “The apartment-building industry is really coming together and in better shape than other parts of the economy.’’

Several of the proposed projects are scaled-back former luxury condominium developments that stalled when the housing market toppled in 2008. Some developers have converted those plans to apartments, making up anticipated losses by squeezing more rental units into the same space or adding height to an existing floor plan.

John F. Palmieri, director of the Boston Redevelopment Authority, said the abundance of proposals signals a shift in lending. With demand for apartments strong, financing for such projects is easier to secure than money for other types of construction.

The market for office towers is almost nonexistent, for example, as few companies are growing enough to spend heavily on new headquarters. Those that are seeking new space are finding bargains in existing buildings, where rents have dropped during the recession.

A similar dynamic is unfolding in the condominium market, where demand has slowed to the point where lenders are not willing to take risks on construction of pricey condo towers like those that proliferated in the mid-2000s.

Many of the planned apartment projects would be downtown, where vacancy rates are below 5 percent, Palmieri said.

“There’s obvious demand in Boston,’’ he said. “Equity people are more likely to lend because they know the demand exists.’’

In Greater Boston, vacancies fell in the third quarter to 5.4 percent, the lowest level in 21 months, according to Reis Inc., which tracks occupancy in buildings with 40 units or more. The national average was 7.1 percent.

The demand for apartments also resulted in rents rising by 1.3 percent to $1,730 a month in the third quarter.

The redevelopment authority has already approved 234 units at Waterside Place in South Boston and 200 units at the former Dainty Dot hosiery factory at 120 Kingston St. in Chinatown.

Several other proposals are under review, including a 128-unit complex at 100 Arlington St.; 395 units at the Kensington, a 29-story residential complex in Chinatown; and a 184-unit building on A Street in South Boston.

Three other developers have submitted letters to the city about plans for apartments in the Fenway/Kenmore Square area and downtown.

Additionally, a half-dozen developers have expressed interest in buying the former Filene’s building at Downtown Crossing, where they would build apartments and retail space. The boarded-up shell — now owned by Vornado Realty Trust and developer John B. Hynes III — was a casualty of the economy’s downturn in 2008 when a proposal to build 166 condominiums, stores, restaurants, and a hotel on the site fell through.

In South Boston, Drew Co. has scaled back its ambitious proposal to build 209 condominiums, a hotel, retail space, and a parking garage at Waterside Place. The new plan, approved by the BRA earlier this year, calls for 234 rental units and smaller spaces for retail and parking.

Susan Allen, executive vice president at Drew Co., said it is assembling the financing. Potential investors have responded “fairly positively,’’ she said.

“It’s a combination of Boston, which is well thought of by investors, and the property type being rental,’’ she said. “Apartments are doing well.’’

David Begelfer, chief executive of NAIOP Massachusetts, a commercial real estate development association, said investors are interested in financing apartments because rental housing offers reliable returns. Pension funds, real estate investment trusts, and other institutional investors are especially eager to fund projects in neighborhoods where they predict tenant turnover will be low.

Begelfer said the surge has made him cautiously optimistic the housing market will improve.

“This may be green shoots,’’ he said of the surge in apartment plans. “But I’m not sure we’re going to see a forest all of a sudden.’’

Barry Bluestone, dean of the School of Public Policy and Urban Affairs at Northeastern University, said the construction is overdue. Historically, apartments have been difficult to build in Boston and much of Massachusetts because of the public’s resistance — many property owners fear rentals hurt overall property values.

Developers also turn their back on such projects in Boston because they know the permitting and public-hearing process can be lengthy and contentious.

The dour economy and the promise of jobs have changed all that, he said.

“If we’re seeing a spurt, it’s terrific in terms of the short term impact, and it’s equally terrific helping solve a rental-housing problem that’s has been endemic,’’ Bluestone said. “People recognize this is a time when we should pull out all the stops to pull the economy out of the recession, and housing creation is one good way to do it.’’

This month, the BRA approved revised plans for the Dainty Dot site. The first proposal from Hudson Group North America LLC, approved in 2008, called for 147 condominiums. The latest plan calls for 200 rental units and a 26th floor.

Hudson principal Ori Ron said market changes and financing problems delayed the initial plan. Ron said he changed the project to include apartments because it was the only way to get financing. But he hopes lending prospects will improve in upcoming months and he can add more condos to the mix.

“Over the last six months, there’s a 180-degree turnabout in the banking industry, he said. “Six months ago the banks would say they were only refinancing existing development.’’

Megan Woolhouse and Casey Ross Boston Globe, October 24, 2010

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