In the last week, CNBC published an article which suggested that "There is an acute crisis coming towards us" in the multifamily real estate sector. The article concludes that the upper end of the luxury market is overbuilt and vulnerable to a flattening or market correction. Apartment developers in the top 150 US towns constructed 395 775 housing units last fiscal year. This represents an increase of 46% over previous years. Of the new housing units, nearly 75-80% of them are considered to be luxury communities. ,More info.

I've witnessed many large developments being built at a rapid pace when I lived in Boston in recent years. A majority of these developments are luxurious luxury residences which the majority of people can't afford. In fact there is a reason why the Spotlight Team at the Boston Globe recently published a series of pieces 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 doesn't cater to the diverse population of the city.

With the arrival of all of these new multi-family luxury properties is this putting the entire multifamily sector at risk of collapse or flattening? The risk of Class A new construction is apparent if the market flattens but the existing Class B & C multifamily communities are uniquely positioned to stand up to market imbalances and corrections. Let's go through the reasons behind why there's been an increase in luxury and what could happen in the event that demand declines.

The demand for luxury goods is strong

There are two major reasons of the growing demand for luxurious apartments. Generation Y and empty nester baby boomers are moving to cities such as Boston, Austin, and Denver with a discerning palate for luxury finishes and amenities-packed buildings. This growth can be attributed to the reality that empty-nesters and double-income millennial households are choosing to rent rather to purchase. Benefits like high-end fitness centers, concierge services and fully-service pet spas are becoming the standard. With every new development, it seems as though there's an arms race. Developers are rushing to incorporate these types of modern perks in their developments, however it's not cheap.

New construction is expensive

The reason the vast majority of the new housing complexes you see coming on the market are luxurious is because of the rising price of construction labor and building materials. Construction labor is highly sought-after and materials are priced at their highest price ever. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury building or in a low-cost construction. It's priced the same." As a result of high prices for labor and materials as well as the rising value of the natural resources, developers are obliged to build luxurious products because the numbers simply don't make sense to construct any other kind of building. Cities are forced to pass rules that require developers to create a certain number of affordable units within their new construction projects. The average number of units as well as the location determines how much they will charge. These regulations will not result in an increase in affordable housing.

What are the alternatives for affordable housing? Read more.

There have been numerous cycles of boom and bust in the construction industry over the decades. There are many apartments constructed between 1970 and 1990 in various markets across the United States. Although these properties might seem outdated compared to current construction, the "bonesare still in good condition. Buildings built during this time frame have been constructed with contemporary materials and techniques, and typically require only surface renovations with the replacement of wear and tear items. These apartment communities, and the secondary markets they're in are well-positioned to counterbalance the flood of new luxury apartments and maintain housing that is relatively affordable. The best part about Class B properties is that they typically are able to perform well in all economic climates. If the economy is robust, Class C tenants move into Class B properties. When the economy is in decline Class A tenants are forced to relocate to more affordable Class B homes. Investors can usually buy these homes for only a small portion of the cost of building they can provide a comfortable place to live yet still keep the rents at a level attractive to tenants of many income ranges.
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