CNBC published a report this week that said that the multifamily realty sector is in the midst of an "acute crisis". The article suggests that the top end of the market for luxury is overbuilt and vulnerable to a flattening or market correction. In reality, apartment builders in the largest 150 US cities constructed 395,775 brand new housing units last year, which represents an increase of 46% year-over-year. Of these new housing units, nearly 75-80% of them are considered to be luxury communities. ,Read more.

I've witnessed many large developments built at breakneck speed when I lived in Boston for the past few years. It's not surprising that the vast majority of these properties are luxurious luxury residences that the average person are unable to 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 and an overabundance of luxury housing that do not meet the needs of the diverse population of the city.

With the arrival of all these new multi-family luxury properties is this putting the entire multifamily market at risk of a flattening or collapse? The risk of Class A new construction is apparent if the market flattens, however; the existing Class B & C multifamily communities are well-positioned to withstand market imbalances and corrections. Let's look at the reasons for this boom in luxury, and what happens if the boom ends.

The demand for luxury goods is strong

There are two main drivers to the increasing demand for luxurious apartments. Baby boomers are making their way to cities like Boston and Austin as well as Denver, with a taste for luxurious finishes and amenities-packed structures. This growth is due to the fact that empty nesters and households with double incomes prefer renting rather than buy. Benefits like high-end fitness centers, concierge services and fully-service pet spas are becoming standard. There's an inordinate quantity of amenities available with each new building. Developers are aggressively incorporating modern amenities in their developments, however, it doesn't come inexpensively.

New Construction is costly.

The reason the majority of new housing complexes you see coming on the market are luxurious is because of the ever-rising price of construction materials and labor. Construction labor is in high demand and materials are priced at their most expensive ever. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury building or in a budget-friendly structure. It's the same price. It costs the identical." To make sure that affordable housing is available, cities are enforcing regulations that require developers to include affordable units within their new construction projects. The average unit count and the location determines how much they will charge. This will not result in an increase in the number of affordable homes.

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

There have been numerous boom and bust cycles in the building industry throughout the decades. There are many apartment buildings built between 1970 and 90 in various cities across the country. Although these properties might seem outdated compared to current construction but the "bones” are still good. Buildings built during this time frame have been constructed with modern techniques and materials. They typically require only surface renovations with the replacement of wear and tear items. These communities, as well as the secondary markets they're in, are positioned well to counterbalance the influx of luxury homes being built and provide housing that's fairly affordable. The Class B homes can succeed in any economic situation. When the economy is strong Class C tenants can move into Class B properties. When the economy is struggling tenants of Class A have to shift to Class B properties. These homes are usually accessible for less than cost of building. This lets investors offer an ideal location to live in while still offering appealing rents that tenants of different incomes are able to afford.
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