This past week, CNBC published an article which suggested that "There is a crisis of extreme proportions that is coming towards us" within the multifamily real estate sector. According to the report, the market's luxury end is too crowded and vulnerable to market corrections or flattening. In actuality, apartment developers in the top 150 US cities constructed 395,775 brand new housing units last year, which represents an increase of 46% year-over-year. In these new homes, around 75-80% of them are considered to be luxury communities. ,Read this.

In my time in Boston over the past few years, I've witnessed numerous major developments being constructed at a breakneck speed. Not surprisingly, the overwhelming majority of these homes are high-end luxury apartments which the average citizen cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article pointed out the absence of affordable housing as well as the overabundance of luxury homes that does not cater to the diverse population of the city.

With the arrival of all these luxury multifamily properties, does this put the entire multifamily sector at risk of flattening or collapse? If the market slows down, there is a risk of a collapse for Class A new construction. However, existing Class B & C multifamily communities are able to withstand market volatility and market imbalances. Let's go through the reasons behind why there's been an unprecedented growth in the luxury market and what happens when demand slows.

Luxury demand is strong

There are two major reasons of the growing demand for luxury apartment. Baby boomers and empty nesters are moving into cities like Boston, Austin & Denver with a keen interest in luxurious finishes and amenities-packed properties. The rise in popularity can be attributed to the reality that empty-nesters and households with double incomes prefer renting rather than buy. Luxury gyms, concierge service and full-service spas for pets are all becoming the norm. With each new building there is a sense that there is an amenities arms race. Modern amenities are being incorporated into development projects rapidly however, it's not cheap.

New Construction is Cost Prohibitive

The main reason why the majority of new residential developments being put up for sale is luxurious is because of the increasing costs of construction labor and materials. Construction labor is highly sought-after and materials are at their most expensive ever. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or low-cost ones." It costs the same." As a result of high materials and labor costs and the appreciation of the raw land, developers are required to construct luxury homes since the numbers don't allow for building any other kind of building. Cities are being forced to adopt rules that require developers to create the right amount of affordable homes within their new construction projects. Typically between 10%-20% depending on the number of units and location. However, these regulations alone won't result in a significant increase in the number of affordable housing.

What are the alternatives to affordable housing? Going here.

There have been numerous boom and bust cycles within the building industry over the decades. There are many apartments built between 1970 and 1990 in various areas across the United States. Although they may seem very out of date compared to what's being built nowadays but they're "bones" are good. Buildings built during this time frame have been constructed with contemporary materials and techniques, and generally only require surface rehabilitation with the replacement of wear and tear items. These communities, as well as the secondary markets they serve are well-positioned to offset the flood of luxury homes. They also offer affordable housing. The Class B homes are able to thrive in any economic environment. If the economy is flourishing Class C tenants can shift to Class B properties . When the economy is in decline, Class A tenants can no longer justify the luxury rents, and they typically shift to more affordable Class B properties. Investors can usually purchase these properties for a fraction of the cost of building, which allows them to provide a great living space, yet keep the rents affordable to tenants with varying income ranges.
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