The week before, CNBC published an article in which they claimed that "There is an urgent crisis that is coming towards us" in the multifamily real estate market. The article concludes that the upper end of the luxury market is overbuilt and vulnerable to a flattening or a market correction. In actuality, apartment developers in the top 150 US cities built 395,775 new housing units in the last year, which marks an increase of 46% Y-o-Y. Of the new homes, around 75-80% of them are considered to be luxury communities. ,Discover more here.

While living in Boston in the last few years, I have witnessed several major developments being constructed at an incredibly rapid pace. Not surprisingly, the overwhelming majority of these homes are luxury homes that your average citizens can't afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article highlighted the lack of affordable housing as well as the overabundance of luxury homes that does not cater to the diverse population within the city.

Do these multifamily developments pose danger to the multifamily market? If the market is flat, there is a risk for Class A new construction. However, the existing Class B & C multifamily communities can withstand market fluctuations and imbalances. Let's go through why there has been such a luxury boom and what will happen if demand subsides.

Demand for luxury is on the rise

There are two major factors driving the rising demand for luxury apartments. Baby boomers are moving to cities such as Boston, Austin, and Denver, with a taste for luxurious finishes and amenities-packed properties. One of the main reasons for this growth is that lots of double-income millennial households and empty nesters with the money to purchase are choosing to rent. Facilities like top-of-the-line gyms, concierge services and pet spas that are full-service are becoming the standard. With every new development, it seems as though there's an arms race. Developers are actively incorporating modern amenities into their plans, but it's not inexpensively.

New Construction is costly.

The primary reason for the vast majority of the new housing complexes you see being put up for sale is luxurious is because of the increasing costs of construction labor and building materials. The demand for construction labor is at an all-time high, as is the price of building materials is at their highest ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury structure or in a budget-friendly building. It costs the same." It costs the same." To provide affordable housing cities are now enforcing laws which require developers to build affordable units within their construction plans. Most often, between 10% and 20% based on the unit count and the location. However, these regulations alone won't result in a significant growth in affordable housing.

If Affordable Housing Can't Be Built, What is the Alternative? More info.

There have been many boom and bust cycles in the building industry over the decades. You will find many apartments built between 1970 and 90 in various areas across the United States. While these properties may feel very out of date when compared to the buildings that are being built today however, they're "bones" are quite good. The buildings built during this time were constructed using modern materials and techniques. They typically only require surface rehabilitation and wear and tear items can be replaced. These communities as well as their secondary markets are well placed to offset the flood of luxury homes. They also offer affordable housing. The Class B homes are able to perform in any economic climate. When the economy is strong Class C tenants are able to are able to move into Class B properties When the economy is struggling and Class A tenants are unable to find it difficult to justify the extravagant rents and typically move down to class B properties. These properties are often offered for less than the price of construction. This lets investors offer an ideal property to live in and yet still pay attractive rents that tenants with different incomes can afford.
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