Marketing Outlook

stakeholder issue

Fall 2023


September 27, 2023

Marketing Outlook

Boston’s real estate market activity during 2023 has been influenced by changes in market conditions and demographic shifts, the obvious ones being higher interest rates, lower levels of available inventory and an acceleration of remote work patterns. As we have observed in past issues of The Stakeholders’ Report, Boston continues to be in an enviable position among major cities with its educated populous and diversified presence in important future fields such as health care, education, biotec and robot-ics. Our market has demonstrated its characteristic resilience through this turbulent period, surprising absolutely nobody.

It isn’t enough, though, to rely on axioms, thereby closing our eyes to some of the important trends that are currently shaping the future of housing. The higher rates are attributable to the actions of our policymakers who are responding to economic conditions in textbook fashion, utilizing the impactful yet imprecise Keynesian monetary tools at their disposal. After all, protecting the dollar and guarding against inflation are the longstanding chief mandates of the Fed.

Multiple drivers of change often work in tandem, however, and post pandemic living patterns are shaping up to be markedly and enduringly different than they were be-fore. While these profound changes have been a boon to vacation real estate markets as well as to the entire states of Vermont and Florida, new research suggests that larger knowledge economy based cities like Boston may have to innovate in order to maintain their dominant positions.

Chart 1

The higher interest rates we have suffered are tied directly to the Fed action, which in turn is prompted by its read on key economic numbers. Every important metric has a target range and the idea is that monetary policy can bring the numbers into line. The most important number the Fed monitors is the rate of inflation, which it wants to see in the range of 2%.

Of course lower rates of inflation are necessary to protect the currency and promote stability of society. It is an interesting piece of trivia that the precise figure of 2% was arrived at somewhat arbitrarily in 1988 when New Zealand’s central banker, Don Brash, off-handedly suggested in an interview that New Zealand’s target rate of inflation should be 2%. Both inflation targets and the 2% figure in particular subsequently gained favor in countries throughout the industrialized world. Fed Chair Ben Bernanke made the 2% target explicit in 2012.

After spiking to 9.1% in June of 2022, the inflation rate by June of 2023 had dropped to 3% (SEE CHART 1). Along with dampening inflation, increasing rates 11 times since March of 22’ as of this writing has also resulted in a direct hit to the affordability of real estate for every home borrower. The Fed does not consider the battle with inflation to be over by any means, though its actions have not resulted in more joblessness as would be expected. In fact, as of July 2023, the unemployment rate stood at an astonishingly low 3.6% with any-thing under 5% being considered full employment (SEE CHART 2).

Chart 2

Gross domestic product (GDP) has moderated as the result of the rate in-creases, with the 2% to 3% zone being the range that economists believe rep-resents sustainable growth without unduly fueling inflation (SEE CHART 3). Importantly, home sales, are trend-ing down from levels seen in 2022 (SEE CHART 4). The common sense interpretation of these statistics as they relate to real estate is that higher rates have meant fewer transactions. Many home-owners have opted to hold on to their low rate mortgages. Some prospective home buyers have stayed on the side-lines and those that have entered the market have still had to compete for choice homes notwithstanding the higher rates.

Chart 3

Chart 4

Chart 5


Fed watching alone without consideration of greater context could cause one to miss the enormity of the changes in housing patterns that are taking place. Cities are facing major challenges on a number of fronts. In what has been coined the “Doughnut Effect”, demand has shifted from many core cities to the areas immediately surrounding them. Remote work and online shopping have caused the urban retail sector to weaken and the office market has been weaker still. Crime rates and homelessness in many major cities have worsened. The high cost of housing in major cities has resulted in Millennials, younger Gen Xers, and older Gen Zers to look outside to the radius of the doughnut.

In a comprehensive report recently released by McKinsey Global Institute, titled Empty Places and Hybrid Spaces: The Pandemic’s Lasting Impact on Real Estate, real estate trends in and around 17 superstar cities were analyzed. The term “superstar cities” originally coined by Joseph Gyourko of Wharton Business School and The Bureau of Economic Research, refers to those cities which are responsible for a disproportionate share of GDP and GDP growth. The study measured rates of urban versus suburban population growth in detail from the onset of the pandemic through 2022. It turns out that Boston has actually experienced one of the more pronounced shifts in momentum away from the urban core (SEE CHART 5).

The study further concludes that by 2030, there will be 9% lower demand for retail space in the median city studied and 13% lower demand for office space. The outlook for residential is also murky with a projected 10% lower demand is forecast for the median city studied, notwithstanding the fact that housing demand actually increased nominally from 2019 to 2022. The report does suggest that downward price adjustments for residential real estate are not accounted for in the study and that should such adjustments occur, urban growth rates could be favorably impacted. These trends may have implications for Boston, though they are developing amidst a continuing housing shortage within the city.


All real estate is inherently local and there is good reason to believe that Boston’s prospects are very good for the creation of the conditions necessary to thrive in the post pandemic era. First, it should be noted that the impact of remote work is expected to be felt mostly in the neighborhoods within cities that feature a particular density of office space. Neighborhoods such as the South End, Beacon Hill, and even Back Bay will be relatively less impacted.

The McKinsey report is also clear to state that downtowns with a high density of office space also possess opportunities to reinvent themselves through addition of hybrid office space (think “drop by for a meeting” rather than being chained to your desk from 9:00 to 5:00) and advent of spaces that will draw out the non-commuters (perhaps a pickle ball court to replace that floundering department store near you?).

The innovation required to remain relevant must also include the creation of additional housing. This new housing is needed in order to accommodate both the luxury market and, importantly, to build the “workforce housing” we will require while at the same time revitalizing the areas within the city that have the highest concentration of office space. Toward that end, Mayor Michelle Wu announced this past July that the City will launch a new “Downtown Office to Residential Conversion” pilot program, a pub-lic-private partnership to incentivize the conversion of underutilized office buildings to residential use in the downtown.  Under the program, developers will see up to a 75% reduction in city taxes on properties converted from office to residential use for a period of up to 29 years.

Boston does score highly among urban centers in terms of public safety and overall livability and features a highly ranked public transportation system. According to Urban Scout, Boston makes the top ten list of safest large cities in America and according to Visual Capitalist, Massachusetts is home to an impressive 26 out of the 100 safest communities in the country overall. According to Resonance Consultancy, from thousands of U.S cities, Boston ranks number 36 of best cities in which to live and ranks #14 for Prosperity (number of Global 500 headquarters, GDP per capita, employment rates and income equality). In a study conducted by WalletHub, Boston’s public transportation system was ranked as the second best in the country despite its many problems, with $9.2 billion dollars to be spent on further upgrades in the next five years.

  1. HOUSING PATTERNS ARE IN FLUX ACROSS THE GLOBE and we can’t predict precisely how they will shake out in the coming years. According to The Royal Institution of Chartered Surveyors (RICS), North America is struggling to find a new pattern. Their study concluded, however, that while urbanization overall will not reverse, it will likely be distributed more evenly between the cores of major cities to the areas around them. This fact cannot be ignored.
  2. CERTAIN CITIES APPEAR BETTER ABLE TO WEATHER THE EFFECTS of changes underway, and for all of the reasons stated in this article, Boston is likely to be one of these cities.
  3. A SEVERE SHORTAGE OF HOUSING EXISTS, which according to Freddie Mac is in the range of 3.8 million homes nationally (some estimates are even higher). While Boston remains challenged in terms of its ability to create affordable housing, there is a shortage of luxury housing as well. Boston needs to continue to be viewed as a place worthy of the premium that one must pay to live here and it is a good bet that such will be the case.
  4. PRICES WILL LIKELY NOT DROP IN BOSTON BUT INTEREST RATES ULTIMATELY WILL. Trying to time the market is not a winning strategy. According to prominent real estate expert Barbara Corcoran of Shark Tank, when rates come down two points, “It’s going to be a signal for everybody to come back and buy like crazy and the house prices will likely go up by 20%.”

Steven Cohen Team Bottom-line Advice:


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