CNBC released a report last week that stated that the multifamily realty sector is experiencing an "acute crisis". The article surmises that the upper tier 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 financial year. This represents an increase of 46% over previous years. In these new homes, around 75-80% are considered luxury communities. ,Read more here.

When I lived in Boston during the last couple of years, I've witnessed numerous major developments being constructed at a breakneck speed. Most of these homes are expensive luxury apartments which the majority of people can't afford. In actuality, the Spotlight Team at the Boston Globe recently released a set of pieces that focused on the growth of the "Seaport" neighborhood. The article highlighted its lack of affordable housing as well as an abundance of luxury houses which does not serve the diverse population of the city.

With the advent of all these luxurious multifamily homes, does this put the entire multifamily industry at risk of a collapse or flattening? The danger of Class A new construction is evident if the market is flat but the the existing Class B & C multifamily communities are uniquely positioned to stand up to market imbalances and corrections. Let's look at the reasons of this luxury boom and what happens if it is over.

Demand for luxury is on the rise

There are two main drivers for the rising demand for luxury homes. Millennials and empty-nester baby boomers are flocking to city centers such as Boston, Austin & Denver with a keen interest in luxurious finishes and amenities-packed buildings. One of the main reasons for this boom is that a lot of double-income households, as well as empty nesters that can afford to buy are opting to rent. Facilities like top-of-the-line fitness centers, concierge services, and fully-service pet spas are becoming standard. There's an astonishing amount of amenities being offered with each new building. Developers are rushing to incorporate these types of modern perks into their plans, but they're not inexpensively.

The cost of construction can be expensive.

The reason the vast majority of the new housing complexes you see that are on the market is luxury is due to the ever-rising cost of construction materials and labor. The demand for construction labor is at an all-time high, and the cost of building materials is the most they have ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxurious building or in a budget-friendly structure. It's priced the same." Because of the high prices for labor and materials as well as the rise in the value of natural resources developers are being obliged to build luxurious products because the numbers simply don't make sense to construct any other kind of building. To provide affordable housing, cities are enforcing regulations that require developers to include affordable units in new construction projects. Most often, between 10% and 20% based on the number of units and the location. But, on their own, these rules will not provide a meaningful growth in affordable housing.

If Affordable Housing isn't Built, What is the Alternative? Go here.

Through the years, there has been building booms and busts. You will find many apartments constructed between 1970 and 1990 in various markets across the nation. While they may seem old-fashioned compared to modern construction but the "bonesare still in good condition. Buildings built during this time frame were constructed using modern materials and techniques and typically only need surface rehabbing with wear items replaced. These communities and their secondary markets are well placed to counter the influx of luxury homes. They also offer affordable housing. These Class B properties can succeed in any economic situation. When the economy is strong, Class C tenants are able to move into Class B homes. When the economy is in decline Class A tenants are forced to relocate to Class B homes. They are typically accessible for less than price of construction. This allows investors to offer an ideal place to call home while still offering attractive rents that tenants with different income levels are able to afford.
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