CNBC issued a report this week that stated that the multifamily real estate sector is experiencing an "acute crisis". The article suggests that the upper end of the luxury market is overbuilt and vulnerable to a flattening or a market correction. In reality, apartment builders in the largest 150 US cities delivered 395,775 new housing units last year, which is a 46% increase Y-o-Y. Nearly 75-80% of these new homes are in luxury communities. ,Learn more.

When I lived in Boston over the past few years, I have witnessed many major developments being built at an incredibly rapid pace. As a result, the overwhelming majority of these homes are high-end luxury apartments which the average citizen cannot afford. In actuality, the Spotlight Team at the Boston Globe recently published a series of articles that focused on the growth of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing, as well as the overabundance luxury housing that don't meet the needs of the diverse population of the city.

With the arrival of all these luxury multifamily properties, does this put the entire multifamily market at risk of a flattening or even a collapse? If the market slows down and the risk of collapse increases, it is of a collapse for Class A new construction. However the existing Class B & C multifamily communities can stand up to market fluctuations and imbalances. Let's look at the reasons for this boom in luxury, and what will happen if it is over.

Luxury Demand is Strong

There are two main reasons to the increasing demand for luxury apartments. Millennials and empty-nester baby boomers are moving into cities like Boston, Austin & Denver with a discerning taste for high-end finishes and amenity-packed structures. The rise in popularity is due to the trend that empty nesters and double-income millennial households are opting to rent instead than purchase. The latest gyms, concierge services and full-service spas for pets are becoming more regular. There's an astonishing quantity of amenities available in every new building. Developers are aggressively incorporating modern amenities in their developments, however it's not cheap.

New Construction is Cost Prohibitive

The primary reason for the vast majority of the new homes being put up for sale is luxury is due to the ever-rising price of construction labor and materials. Construction labor is highly sought-after and materials are at their highest price ever. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or low-cost ones." It's exactly the same price. It costs the same." Cities are being forced to adopt laws that force developers to construct a certain number of affordable units within their construction projects. Typically between 10%-20% depending on unit count and the location. But these rules alone won't result in a significant increase in the number of affordable housing.

If Affordable Housing Can't Be Constructed, What's the Alternative? Visit this link.

There have been many boom and bust cycles in the building industry over the years. In numerous markets across the country, you will notice large numbers of apartments constructed between the 1970's-1990's. While these homes may appear old-fashioned compared to modern construction however, the "bones” are still good. The buildings built during this time were built using the most advanced materials and techniques. They usually just require minor repairs, and wear items can be repaired. These communities, as well as their secondary markets are well placed to counter the influx of luxurious apartments. They also provide affordable housing. These Class B properties can perform in any economic climate. When the economy is strong Class C tenants are able to move up into Class B properties . When the economy is struggling, Class A tenants can not afford the high rents and typically move down to more affordable class B properties. These properties are often available for less than the cost of building. This allows investors to offer an ideal location to live in while still offering attractive rents that tenants of different income levels are able to afford.
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