Identifying Opportunity in the Recovery Cycle

June 7, 2025 | Author:  David J. Murphy

The recovery is underway, but timing matters

The commercial real estate market has entered a decisive inflection point. Analysis by Hines Research found that as of Q3 2024, just over 66% of global markets were in some phase of the “buy” cycle, the highest level since 2016, according to the World Economic Forum. For capital partners focused on residential development, this shift presents compelling opportunities, particularly in supply-constrained markets like New England.

But here’s what makes this cycle different. It’s not being driven by easy money or speculative fervor. Instead, we’re seeing a fundamental repricing of assets for a higher rate environment, combined with persistent supply-demand imbalances that create sustainable investment theses.

The data supports this view. Multifamily purchase lending in New Hampshire jumped 18.4% to nearly $90 million through the first nine months of 2024, according to Banker & Tradesman. While other regions saw lending contract, New England demonstrated resilience, a clear signal that institutional capital recognizes the region’s structural advantages.

Why New England’s fundamentals are compelling

New England’s residential development market exhibits three characteristics that distinguish it from national trends. Geographic constraints limit supply, demographic stability supports demand, and regulatory frameworks, while complex, create barriers to entry that protect existing investments.

Unlike Sun Belt markets where development can sprawl endlessly, New England faces natural supply constraints. Zoning restrictions, environmental regulations, and simple geography mean new supply comes online methodically. This dynamic creates pricing power for well-positioned developments, exactly the type of market inefficiency that sophisticated capital can exploit.

The demographic profile is equally compelling. The region’s concentration of world-class universities, healthcare systems, and technology companies generates consistent demand from educated professionals in high-paying, recession-resistant industries. These aren’t cyclical jobs that disappear during downturns. They form the foundation of stable rental demand willing to pay premium rents for quality housing.

For example, Boston-area employers like Amazon and Salesforce are implementing return-to-office policies, potentially driving increased downtown residential demand. Meanwhile, the city’s innovative commercial-to-residential conversion program is creating new supply while addressing market dislocations including excess office space and housing shortages.

Capital structure evolution creates opportunity

The traditional playbook of maximum leverage and minimal equity is obsolete. But this disruption has created opportunities for capital partners who understand the new market dynamics.

Construction financing rates have begun to moderate. The National Association of Home Builders reports that land acquisition loan rates declined from 8.48% to 8.23%, while speculative construction financing dropped from 8.34% to 8.08% in Q1 2025. The improvement is modest but directionally positive, particularly for projects with strong fundamentals and experienced development teams.

More significantly, the capital stack is evolving in ways that favor sophisticated investors. Traditional bank lenders remain cautious, opening opportunities for alternative capital sources willing to provide flexible financing solutions at attractive risk-adjusted returns.

First Boston Capital Partners exemplifies this trend, recently expanding their credit facility to $115 million with BankUnited specifically to meet growing demand in Greater Boston markets. Since 2022, they’ve originated over $600 million in loans, demonstrating that substantial capital continues flowing to quality projects with appropriate structures.

The optimal approach? Preferred equity and mezzanine structures that offer current returns plus upside participation. While traditional developers struggle with all-debt structures in the current environment, capital partners providing flexible solutions are finding multiple compelling opportunities across the risk spectrum.

Government-sponsored financing remains the gold standard

For qualifying projects, government-sponsored enterprise (GSE) financing through Fannie Mae and Freddie Mac continues offering the most attractive terms. Fannie Mae Multifamily remains a major source of financing, with their program historically focusing on workforce housing that aligns well with New England’s market characteristics and pricing dynamics.

The HUD 221(d)(4) program provides particularly compelling terms for developers willing to navigate the process. Non-recourse, 40-year fixed-rate construction-to-permanent financing at up to 85% loan-to-cost for market-rate developments and 87% for affordable housing projects. While bureaucratic and time-consuming, the program offers unmatched financing for appropriate projects.

The gap between traditional lending capacity and project requirements represents the primary opportunity for private capital. Bridge financing, preferred equity, and development capital are commanding premiums because supply has contracted while demand for quality developments remains robust.

Connect CRE reported that MassHousing made its first financing commitment under the state’s new Momentum Fund, providing public equity financing for a 92-unit mixed-income project in Milton. This hybrid public-private structure represents an emerging trend toward creative financing solutions that blend government support with private capital, potentially creating a new asset class for sophisticated investors.

Transaction evidence supports the thesis

Recent transaction activity demonstrates that institutional capital recognizes New England’s opportunity. Bisnow reports that Developer Garden Homes secured a $117 million construction loan from Goldman Sachs for a 292-unit multifamily project in West Newton. This isn’t bridge financing or short-term money. It represents institutional capital making a significant bet on New England’s residential future.

Similarly, Scape and Morro USA received approval for their 400-unit, 28-story development in Boston’s Fenway neighborhood, demonstrating that quality projects with strong fundamentals continue attracting substantial investment despite challenging market conditions.

The luxury condominium segment represents an important market indicator. The 51-story South Station tower’s new Ritz-Carlton luxury condos will serve as a key test for buyers’ willingness to invest in high-end housing despite elevated interest rates, according to Axios Boston. The project’s performance will provide valuable insights into premium market demand in the current environment.

Condominium development offers differentiated returns

While multifamily rental properties dominate industry discussion, condominium development in New England presents a distinct risk-return profile worth considering. The region’s high home prices and limited supply create natural demand for well-located condo developments, particularly in urban and transit-accessible locations.

New England Real Estate Journal highlighted a luxury condominium project at 120 Nantasket Avenue in Hull, Massachusetts, a four-story, $22 million development featuring 21 ocean-view residences with move-in dates projected for late June 2025. This represents exactly the type of project that attracts both end-users and investors in New England’s supply-constrained market.

The key advantage of condominium development versus rental properties is exit flexibility. Successful condo developments generate returns through unit sales rather than requiring long-term holds, which can be particularly attractive in an uncertain interest rate environment. Additionally, pre-sales provide market validation before substantial capital deployment.

Cycle positioning and forward outlook

Understanding current cycle positioning is crucial for optimal capital deployment. All indicators suggest we’re in early recovery, historically one of the most attractive periods for real estate investment, as assets price for pessimism while fundamentals begin improving.

Several factors will shape the New England residential development market through 2025.

Interest rate trajectory remains uncertain. While rates may stay “higher for longer,” the region’s supply constraints and demographic trends suggest continued opportunity regardless of modest rate fluctuations.

Regulatory developments in Massachusetts include recent housing legislation with expedited permitting provisions and zoning reforms that could accelerate development timelines for near-term projects.

Office-to-residential conversions present growing opportunities. With downtown office vacancy rates remaining elevated, conversion economics are becoming increasingly attractive for capital partners willing to navigate adaptive reuse complexity.

The investment opportunity

New England’s residential development market in 2025 offers a compelling combination of supply constraints, demographic stability, and financing gaps that create opportunities for sophisticated capital partners. Unlike speculative Sun Belt growth plays or distressed gateway city situations, New England represents fundamentally sound market dynamics repricing for a new interest rate environment.

This isn’t a distressed opportunity play. It’s strategic positioning for the next cycle. Capital partners who can provide flexible financing solutions for quality developments in supply-constrained markets are finding attractive risk-adjusted returns while positioning for significant upside as market conditions continue normalizing.

Institutional capital continues flowing to appropriate projects with suitable capital structures. The developers and capital partners succeeding in today’s environment understand opportunities may be even more attractive for those willing to adapt.

The fundamentals are clear. The cycle has turned, supply-demand dynamics remain favorable, and financing gaps create genuine opportunity. Capital partners positioned to identify and execute effectively will find New England’s residential development market offers compelling risk-adjusted returns.

David J. Murphy is the managing attorney of the law firm of Murphy PC in Boston, Massachusetts.  He regularly represents real estate developers and investors in real estate development projects.