Ken Gronbach is a demographer, an occupation defined by his daughter as a person who counts and tracks people. Ken says “demographics precipitates economics” and according to this blogger he is simply saying: An increase in population leads to an increase in demand for goods and services. And vice-versa.
One important and predictable characteristic of demographics is age. As people age, they need and want different things, and that will effect the demand for those items. For instance, as Gen X produced fewer babies than the Baby Boom generation, maternity wards started closing. When this smaller generation became of school age, there were fewer children attending schools, so some schools had to close. Then the smaller generation aged a few more years and started driving fewer motor vehicles. As a result, Ken Gronbach’s motorcycle ad account went from a wheelie to a wipe out. That taught Ken the importance of understanding the age curve in predicting booms and busts.
I asked Ken, “What the age curve of the U.S. population says about the future of the real estate market?” Ken replied: “In under three years the housing market will be back.” Why? In the late 1970s the “Zero Population Growth” movement lost steam and Americans started having babies again. This continued so much so that in 2007 the U.S. set a new record for births in a year. As a result of the increased fertility, Gen Y is not only significantly larger than Gen X, but it is even larger than the “Baby Boom” generation. That, of course, means more demand for goods and services. So as this generation hits the peak home buying years, it will create increased demand for homes in Back Bay, Beacon Hill, Boston, the entire Commonwealth and across the country.
Another aspect of the current age of the U.S. population is that the population of persons 65 years of age and over will go from 35 million in 2000 to 55 million in 2020. Ken says retiring “(Baby) Boomers will flood into Florida” at a rate that cannot be fathomed and turn what is currently one of the toughest markets in the country from bust to boom.
To Learn more about Ken Gronbach and demographics check out Ken’s blog at http://kgcdirect.squarespace.com/ or any one of his several books, such as The Age Curve, at Amazon.com.
Neighborhood Address Price
Back Bay 776 Boylston W-PH2 $13,220,000
Beacon Hill 50 Beacon PH $3,400,000
South End 505 Tremont 1001 $3,200,000
North End 44 Pierce U: 100 $2,145,000
South Boston 9 W Broadway U:605 $1,700,000
Charlestown 44 Constellation Wharf U:44 $1,365,000
Jamaica Plain 62 Pond $1,337,500
Brighton 2420 Beacon PH2 $1,250,000
Leather District 119 Beach St U: 5E $1,135,000
Fenway 22 Medfield U:1 $669,250
Dorchester 1241-1245 Adams U: 611 $575,000
Allston 1304-1312 Com Ave #6 $460,000
West Roxbury 953 LaGrange U:2 $430,000
(Based on information collected from MLSPIN for the settled dates 1/1/11-12/31/11)
At a time when the when famed real estate analyst Karl Case was quoted as saying the market was still “extremely shaky,” this blog forecasted that August would be an “excellent” month for real estate closings in the Greater Boston market. Yesterday, news outlets reporting on a press release issued by The Warren Group, a firm that tracks local real estate data, confirmed the accuracy of our prediction, citing that for August, Massachusetts real estate closings were up 15 percent versus the same month a year ago.
What will the media report for our local real estate’s September numbers? MA-PASS, a firm that processes hundreds of thousands of local real estate showing requests, communicated to this blog that showing requests in August 2011 for Greater Boston home listings were up nearly 4 percent over showing requests in August 2010. As we have repeatedly communicated, real estate sales have a simple chronology: First, property gets shown, then it goes under agreement and finally it closes. As such, any change in the showing market should be reflected in the sales market approximately 40-60 days later. As this is the fourth consecutive month where showing requests have outpaced the same time period the previous year, we are going to go with the momentum and forecast that September 2011 closings will outpace September 2010. At the same time, because this blog does not have a true grip on the sample size, we admit the formula we are using needs some tweaking.
A bonus prediction for the local September real estate numbers concerns the sales of Massachusetts multi-family homes. In July, this blog reported that the first half of the year was the worst for Greater Boston multi-family sales since 1997. Subsequent to that report, however, two incredible things have happened. One, the local rental market has gone ballistic. Some small properties in Greater Boston are seeing a 40 percent increase in rent versus the same time period a year ago. Incredible! On top of it, one highly-regarded Boston real estate investor we know of reportedly told people close to him that it was his feeling that the local rental market hit bottom in 2008 and now would be strong for the next few years. Over the same time period the rental market was going strong, the stock market has been a roller coaster. As such, we are predicting that sales for MLS multi-families will bump up in September 2011 versus September 2010
Can a condominium’s value be a function of it’s height? A review of two years of citywide two-bedroom condominium sales shows that often the higher up you go, the more you pay. In that collection of data, second floor condominiums had higher median sale prices ($359K) than first floor units ($330K). Fourth floor condominiums had higher medians ($550k) than third floors ($386k) And when you got to the fifth floor and above, which in our market connotes an elevator building and modern amenities, it was a completely different value game ($740K median).
In our fair city, however, third floor condominium sale prices can sometimes be an exception to the real estate rule regarding altitude. Jay Plasteras, an agent with more than 25 years of experience, explains that in the Back Bay the “second floor bar none is the most desirable.” He notes that while the second floor provides owners a sense of security versus the first floor, that floor also tends to have higher ceilings, more ornate details and bigger windows than the other floors in Back Bay buildings. In contrast, most third floors are just not as nice as second floors. As a result, median sale prices for two-bedroom condominiums on Back Bay third floors are 14 percent lower — not higher — than the median sale price for second floor two-bedrooms.
In other parts of the city, as well, third floor condominiums may be higher than second floor condominiums, but second floor condominiums have higher median sale prices than third floor condominiums. Yet the reason for it remains ambiguous and the disparity itself seems below the radar to most in the know about real estate values. In Beacon Hill, a review of five years worth of condominium sales showed that the median sale price for third floor one- and two-bedroom condominiums was 10 and 12 percent lower, respectively, than the median for second floor one- and two-bedrooms. Yet when apprised of the discrepancy in the numbers, Pauline Donnelly, a well-respected agent in the neighborhood, attributed it to “random quirky numbers.”
A review of five years of sales in the Fenway area also showed third floor one-bedrooms have a median sale price 8 percent lower than second floor one-bedrooms. There, too, Michael Grappo, a top agent in the area, could not think of a reason for a third floor discount and echoed a similar sentiment as his Beacon Hill peer, calling into question the quality of the data set.
Yet the matter persists; one must wonder, is there something that buyers know that agents and the rest of the community don’t? Will buyers not travel up that extra flight of stairs unless there’s an incentive (like a discount)? Maybe. Consider this: While there are many neighborhoods in Boston where third floor condos have median sale prices equal to or better than second floors, a review of total MLS condominium sales citywide from 8/1/09 through 7/31/11 shows median sale prices for third floor one-bedrooms was less than second floor one-bedrooms. Buyers liking a particular location –but wanting a deal–should consider taking advantage of this quirk in the real estate rule of altitude.
Jonathan Davis, one of the developers behind the Brimmer Street Garage, called the development of a Beacon Hill garage a “no brainer.” When we spoke with him recently, now more than thirty years after the project successfully sold out, he noted that not only was the garage located amidst the wealthiest demographics in the area, but that in Beacon Hill, unlike other parts of the city, there weren’t even alleys that can be used for parking.
Davis credits previous owners of the garage for coming up with the idea for the first “parking space condominiums” in perhaps the history of real estate. Yet it was his development team that figured out a way to get 110 spaces in the garage versus the previous owner’s plans for around 60. This brought the price of the proposed spaces down.
Surprisingly, when marketing the condominiums, Davis and his team had to overcome the fact that many buyers didn’t see the value of owning a parking space at any cost. As a result, the company made a brochure suggesting that if the parking spaces eventually went up to $35,000, it would be cheaper to have bought the space than to have continued to rent it for that time. Indeed, considering the appreciation over the years, any of the original buyers not only have parked there for free for 30 years, but made a tidy profit by successfully investing in something that appreciated five times what gold did in the same time period.
Two aspects of the marketing at the time helped Davis’ team execute the hugely successful sale of the spaces. The first was that they offered the existing renters a 60-day right of first refusal. The second was that just when they were going public with the sale, Pope John Paul II was visiting Boston. The parade of media following the Pope was in Boston and hungry for additional stories. As a result, the story of the first parking space condominium conversion made The New York Times, The Wall Street Journal and the Today Show. In addition, the Associated Press distributed the story to hundreds of newspapers around the country. Such exposure helped create enough demand to sell the available spaces twice over, Davis notes, and provoked around 70 percent of the then-current tenants to purchase their spaces.
Davis notes that his only mistake wasn’t keeping some spaces for himself. While they may not add to his already outstanding reputation as a developer in the city, they would look good in his portfolio.
Need a simple calculation to compare income properties? Take the asking price and divide it by the total monthly rent. What you will get is called the “Gross Rent Multiplier.” Below is a survey of some gross rent multipliers recently seen in different Boston neighborhoods:
Dorchester: This neighborhood has a 40 percent slice of Boston multifamily sale pie. Many properties here sell for under 100 times the gross rent of the property. 16 Normandy, a large three family in need of some work, sold for only 41 times what the broker estimated was “the typical 3BR Section 8 vouchers.” 1150 Dorchester Ave., in the Savin Hill/ JFK area, sold for 86 times the gross rent.
East Boston: This neighborhood sells about 10 percent of the annual Boston multifamilies. In Maverick Square, 75 Chelsea sold for 103 times the gross monthly rent and 12 Chelsea sold for 96 times the gross monthly rent.
Mission Hill: In this hot Boston rental neighborhood close to many universities and colleges, the majority of fully-rented properties we saw were selling between 112-124 times the gross rent. The median pricing of $954K for multifamily homes in Mission Hill provides an idea of the impressive rents these properties can get in this neighborhood.
Allston/Brighton: This is one of Boston’s most established rental neighborhoods for college kids and twenty-something tenants. Gross Rent Multipliers for sold multifamily homes were often observed to be between 130 and 160 times the gross rent. Perhaps the best buys were two of the most expensive properties: 5-11 Etna, at $1.15 million, sold for just over 100 times the gross rent, and 8-10 Glencoe, at $1.290 million, sold for only 110 times the gross rent.
South End: 37 Gray, a three family with what was described as a “good rental history” in the listing sold for 153 times the gross monthly rent; 637 Tremont, a four-unit building which included retail space on the first floor, sold for 165 times the gross rent.
Beacon Hill: 63 Phillips, a four-family — all one bedrooms — sold for $1,080,000, more than 180 times the gross rent.
While this simple calculation provides an easy way to compare income properties, the calculation can be filled with errors and omissions if not done thoroughly. Marty Stone, friend of this blog and author of Secure Your Financial Future by Investing In Real Estate, cautions against using gross rent multipliers as a guide to your property search or to evaluate property investment decisions.
“In my experience there are no magic formulas like a ‘gross rent multiplier’ that will work as well as just doing the homework to make sure you are making the correct decision,” he writes us.
Marty provides an anecdote where his company showed a client a property that was priced at 137 times gross rent in a market that things typically sold income properties at 126 times gross rent. Plugging in market rents, however, caused the 137 times figure to drop to 98 times gross rent — a great buy. According to Marty, doing the homework helps you find the “diamonds in the rough
In June, MA-PASS, the company that coordinates hundreds of thousands of showing requests for Massachusetts real estate agents, informed the Bates Real Estate Report that the company had processed 11 percent more showing requests in May 2011 than it had in May 2010. As a result, this blog predicted that closings for June would be “the best comparative month of the year” thus far.
A Greater Boston MLS report, however, subsequently showed that closings for single families and condominiums in June were off 18 percent from the previous year. That’s certainly an improvement against the disastrous months of April (-24 percent) and May (-21 percent), but it’s not a significant improvement and it’s not the best comparative month of the year (January at 103 percent).
Where did we get it wrong? Well, we bet against June 2010, an unusual month in that it was the key month for which many buyers anticipated they would have to close their homes to receive government credits. Also, we may have slightly overestimated the speed at which an increase in showings will be reflected in an increase in closings. After all, if the increase in showings spiked at the end of the month — due to the 45-day nature of most closings —then perhaps only a small percentage of those spiked closings would be seen in the following month.
As noted in our June 14th post, the natural order of real estate transactions is showings/under agreements/closings. So what might be more readily noticed from an uptick in showings is an uptick in under agreements. If that’s the case, that’s what we saw in June: showings in May went up 11 percent and under agreements in June went up 9.5 percent.
As far as predicting July is concerned, MA-PASS just informed us that showings in June 2011 surpassed June 2010 by 11 percent. Again, this is not apples-to-apples in that the amount of listings in June 2011 is not the same as June 2010, but we have tweaked our prognostication calculation and believing the momentum of two excellent showing months will carry the day, we predict that July will become the best comparative months for closings since the beginning of the year.
When I was in charge of the advertising for the brokerage I managed, I used to keep a book on my desk entitled “Words that Sell.” It was written by a former ad executive and had an arsenal of words and expressions that could lure, compel and persuade. The book included 57 ways to say “authentic” and more than 100 synonyms for “exciting.” Today, words and pictures on the Internet are real estate’s new curb appeal. And because the MLS remarks section is distributed to thousands of websites and seen by millions of consumers, it is critical for firms to bring their A game when describing the state’s most enviable properties.
Just what words are used to sell Massachusetts’ most valuable properties? A recent survey (December 2010) of the MLS descriptions used to lure prospective buyers to the 887 most valuable properties on the market gives us that insight. Apparently, the most important characteristic to convey to prospective buyers is that these properties are “private” (341 times, with another 20 mentions of the phrase “more secluded”). Next, these homes were described not just as “new” but “custom” (234 times). Of course, they are “beautiful” (215 times). And while some may be considered “stunning” (122 times) or “gorgeous” (66 times), only one was described as “pretty.” In regard to superlatives used to describe these properties, the term “spectacular” (137 times) beat out “magnificent” (108 times), but so did the commonly used and more generic-sounding “great” (121 times). Of course, many of these properties were called “elegant” (113 times), “gracious” (84 times), “luxurious” (59 times) and “sophisticated” (21 times). But mostly they are “large” (181 times) and “spacious” (110 times). Less often they are “huge” (43 times). And, by the way, they are never “gigantic.”
“Kitchen” is the most popular part of the house mentioned. It comes up 467 times. And when it does, it often is preceded with “gourmet” (125 times) or professional (52 times). In talking about the kitchen, RealtorsÒ might refer to the brand of the appliances, like the 39 times they mentioned Subzero refrigerators (39 “sub zero,” 15 “subzero” and 16 “sub-zero”) and the 20 times they mentioned Viking stoves. Other times they might just have called the kitchen appliances “top-of-the-line” (16 times) or made the kitchen one of the areas they described with the expression “state-of-the-art” (72 total times).
Another extremely popular part of the home to sell is the master-suite, which came up 309 times. Part of the real curb appeal, the term “landscape” was mentioned 156 times. And when you are reminded that we are talking about the 887 most expensive homes in the state, perhaps it isn’t surprising that a place to park your boat (“dock,” 94 times) came up more often than a place to park your car (“garage,” 85 times).
And, to be clear, when you’re talking about these types of properties, for the most part you’re talking about “estates” (190 times) and not “mansions” (20 times). In terms of where these homes are located, you could find them on a “hill” (85 times) or on a “farm” (60 times), but mostly you find them on the “beach” (153 times).
And just in case you were wondering, they are seldom “exciting” (6 times) and apparently almost never “authentic” (4 times).
It’s been more than 20 years since Debra Taylor started LINK, a multiple listing service in Boston. Today, in addition to covering 12 of the most important Boston real estate neighborhoods, LINK produces quarterly and annual reports about what is happening in the Boston condominium market. I recently checked in with Debra to ask her about the changes she has seen in our great market.
One major change Debra noted was the proliferation of Full Service Buildings in the Boston market. In the mid-1990s, the downtown condominium housing stock was primarily made up of converted brownstones. However, as the local real estate market appreciated, more and more ground-up buildings hit the Boston streets — so much so that LINK created a separate category called “Luxury Buildings.”
Today LINK tracks the details of sales in more than 77 Boston luxury buildings. More recently, buildings such as the Mandarin, 1 Charles and Atelier 505 have set a new bar for luxury and services, so LINK is going to add a new category to its reports: “Ultra Luxury.”
Another change over the two decades Debra has reported on the Boston real estate market is the emergence of the South End as a self-contained, mainstream neighborhood. As it evolved from the ’70s to the ’90s, the South End was primarily known for attracting artists, urban pioneers and alternative lifestyles. (BTW, there is an enjoyable history of the South End in Anthony Lukas’ Pulitzer prize-winning book, “Common Ground.”) Today, it is an affluent area, home to some of Boston’s best restaurants, and not as connected to the Back Bay market as it had been previously. If you walk through the South End today, you’ll likely see more baby strollers than artists.
Debra noted two aspects of the current market — those of opportunity and missed opportunity. The opportunity she sees occurring includes the current state of market affairs leading to the ability to buy in a great building like Harbor Towers, where you get outstanding location, full service and incredible views for only $500 a square foot. The missed opportunity deals with how developers for high-end downtown condominium projects can no longer get financing. Although this blog counts 2010 as one of the best years ever for million dollar Boston condominium sales, the new buildings being planned for the market are destined to become luxury rentals.
As for a change in Boston’s real estate future, Debra optimistically predicts that the efforts to improve city schools downtown will succeed and as a result bring families back to many downtown neighborhoods.
About David Bates
The Bates Real Estate Report is an original content blog about the Greater Boston real estate market. The reports focus primarily on the Greater Boston condominium market, and at the same time can touch on other items of interest and happenings of note in the general Boston market. It is written by a real estate agent who works the condo market and who has a passion for Boston real estate. In addition to this blog, his commentary on the market can now be seen in a variety of leading local real estate publications. If you like his insights, obviously, you should consider using him as an agent.
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