There was a time when most developers’ purpose was to see their property re-zoned from residential to commercial. Residential was the sector that brought up the rear. Residential prices and profits were always the lowest. For a long time during the 1970s, apartment rents in Greater Boston were so low that they could not support the cost of construction. We stopped building apartments.

Not any more.

The tables were turned for apartments some time in the 1990s. Rents in the other commercial real estate sectors lagged. Apartment rents moved ahead. With the bursting of the bubble in the housing market in 2007 and the resulting fear that buying a house was a losing proposition, the demand for rental housing went through the roof. The Boston Globe identifies 5,000 new apartments under construction in Boston this year. The demand has come not only from people who can’t afford to own a house or a condominium. It has come from the high end, from high-salaried people working in the medical district and downtown. It has come from suburban retirees with plenty of money in their pockets. Buildings built as condominiums became luxury rentals. “Luxury” is the word that is everywhere in the ads for our high-end apartments. And they are luxurious. The new apartment dwellers want a concierge at the desk, a safe place to park, an impressive lobby, and a roof deck. They are willing to pay. Developers deliver. The roof deck at Church Park, a redeveloped complex opposite the Christian Science Center, has a big, rooftop Back Bay-style library that the residents share, a grand piano there for whoever can play, outdoor seating groups separated by plantings with places to cook, and gorgeous views from Fenway to downtown.

What opened the gates for the new apartments was the rise in rents. It was also a state law called “Chapter 40B.” Chapter 40B allows developers to build apartments at locations that are not zoned for apartments, providing that 25% of the units are rented at rates that are affordable for low-income residents. Dozens of attractive, 250-unit 40B developments dot the suburbs, providing high-quality units while also incorporating space for non-luxury tenants. Dozens more apartment complexes were built through cooperation with towns that were moved to cooperate by the leverage developers gained from the threat of 40B. In spite of towns’ general reluctance (some would say NIMBY-style resistance) to high density development, Greater Boston succeeded in greatly expanding its multi-family housing stock. It did that and provided new low-income housing without spending a taxpayer cent.

Today, the only $1,000-a-square-foot real estate in Boston is residential. Prices at that level are common for Beacon Hill townhouses and Back Bay condominiums. They are common for Newbury Street retail condominiums, too. But Newbury Street retail space rents for $100 a square foot a year. No one ever thought that residential could compete on price with sectors that rented at that level. Offices certainly don’t. Nothing else comes close.

Apartment prices were knocked down by 30% (and, in satellite cities, more) in the decline that accompanied the credit crisis of late 2008. In the nearly four years since, apartments alone have regained their lost ground. Some locations – for the most part, the low-income suburbs – still lag. Others have gone beyond their previous peak prices of 2007. They have done that because the lid has come off residential rents. They have also done that because interest rates are at record lows, and cheap money allows higher prices than ever before.

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Eric Reenstierna Associates LLC is a real estate appraisal firm taking on valuation and consultation assignments in Greater Boston, Massachusetts and New England. Eric Reenstierna, MAI, is the office's principal and is a commercial real estate appraiser.


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