Everyone knows Somerville’s rags-to-riches story: Multifamily houses in that scrappy, working-class town were gradually bought up by developers who turned them into condominiums and sold them off to yuppies who’d been priced out of Cambridge. Now that the median sale price of a Somerville condo is just shy of $600,000, where will budget-conscious buyers go next?
According to data from The Warren Group, publisher of Banker & Tradesman, there are 4,516 multifamily homes in Medford and 4,101 in Malden just waiting to be renovated, turned into condos and sold to Millennials. What are developers waiting for?
These renovations have already begun in the southwestern corner of Medford, especially on the streets closest to Tufts University. They’re just not catching on in the rest of town yet. Tom Cafarella, of Ocean City Development, said the reason is mostly mathematical.
“It’s pretty simple,” Cafarella said. “Most of those houses are over 100 years old. It can cost $300,000 to do the renovation and conversion because you have to replace everything. The [construction] costs are exactly the same regardless of where the property is, and the resale value just isn’t there in Medford yet.”
Through August, 90 two-family homes have sold in Medford at a median price of $615,000. Add another $300,000 to renovate the building and turn them into condos that real estate agents say will likely sell somewhere in the $400s, and it’s hard to turn a profit. Cafarella said another problem is that developers like him are getting out-bid by homeowners.
“You have a huge supply of owner-occupants and they’re outbidding us,” Cafarella said. “They’re people who can’t afford to buy a single-family home. They’re relying on the rent to get their mortgage and they can afford to pay more than we can.”
Because the margins are thin right now, Cafarella said developers are gun-shy in Medford. That will change when the market does, but nobody wants to be the first to test the water. Once a handful of developers turn a profit there, he said, more will follow.
“If I could get a good deal on a multifamily in Medford, I’d probably consider doing it,” he said. “We’re actually doing one now where the numbers look better if we just clean it up and resell it, rather than take a year rehabbing it and sell the units separately as condos.”
The Numbers Have To Be Right
Jeannie McClean has been selling Medford-area real estate for 30 years and said she’s never seen such a seller’s market. Sales prices are higher than ever, which is great for homeowners, but it makes condo development too expensive – for now.
“We’ve got two-families selling in the eights,” McClean said. “The Tufts area has always been higher. The South Medford area near Somerville is going crazy. You put a property on the market and the offers start at the asking price and they move on up. Don’t expect to get anything at asking price.”
While it depends on the exact location within Medford, she said two-family homebuyers are generally an even mix of owner-occupants and developers.
Medford and then Malden will likely be the next cities to see the kind of renaissance that Somerville has, but it’s going to take a little time for condo prices to outpace the sales price of two-family houses, said local Realtor David Lilley.
“It started in earnest in Cambridge, then it spilled into Somerville, but it’s not in Medford or Malden yet,” Lilley said. “That’s the next frontier. Medford has never warranted the high-end renovation. Once that happens, you will start getting that kind of money, but it will take a few years.”
Malden Should Be Next In Line
“In Malden, you’re right near the T, which is good,” McClean said. “It’s less expensive. The multifamily areas are not as desirable location wise, but around the MBTA stops and in Edgewood they’re moving. It’s just like Medford, but the prices are not quite as high. What’s happening in Medford is going to happen in Malden.”
But Malden currently has the same problem as Medford where the numbers just don’t work, according to Paul Weston of Weston Real Estate. He said that a rehabbed condo in a two-family house would sell in the upper threes, but the median price of a two-family home in Malden so far this year is $475,750. Adding the cost of a $300,000 renovation is a break-even proposition –unless you can find a deal.
“Only one condo has sold for over $500,000 in the last six months. We don’t get too many condo conversions out here,” Weston said. “Not like you see in Medford. I’m seeing it more in West Medford near the Mystic River. There’s a neighborhood that’s been largely untouched over the years.”
Weston said Malden won’t turn into Somerville overnight, but the market is headed in that direction. The city has a renewed emphasis on transit-oriented, mixed-use developments, increasing and improving open space, supporting the arts community, and trying to attract the kind of R&D employers that will bring higher-income residents to the historically working-class city.
“Malden has the potential,” Weston said. “We’re just a little bit further out. You need the commitment from the both the city and the residents. They’re building the housing end of it, but they have to do the business end. We just had a brewery open in the city. Those smaller scale businesses are here. It’s the mid-size and larger businesses we need. We’re playing catch-up to Somerville.”