CNBC published a report this week stating that the multifamily realty sector is in the midst of an "acute crisis". The article concludes that the upper end of the market for luxury is overbuilt and vulnerable to a flattening or market correction. Apartment developers in the 150 largest US towns built 395 775 new housing units in the last fiscal year. This is an increase of 46% over previous years. The majority of the new homes are in high-end communities. ,Read more here.

I've seen many major developments being built at a rapid pace during my time in Boston for the past few years. It's not surprising that the vast majority of these are luxury homes that your average citizens are unable to afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing as well as the inordinate supply of luxury homes that don't meet the needs of the diverse population of the city.

Do these multifamily developments pose an imminent threat to the multifamily industry? If the market slows down it could be a problem for Class A new construction. However existing Class B & C multifamily communities can withstand market fluctuations and imbalances. Let's look at the reasons the reasons for such an increase in luxury and what will happen if demand subsides.

Luxury Demand is Strong

There are a couple of major factors driving the rising demand for luxury apartments. Millennials and empty-nester baby boomers are moving into cities like Boston, Austin & Denver with a discerning taste for luxurious finishes and amenities-packed structures. One reason for this boom is that a lot of double-income households of millennials and empty nesters who can afford to buy are opting to rent. Luxury gyms, concierge service and full-service spas for pets are now regular. With each new building, it seems as though there is an amenities arms race. Modern amenities are being incorporated into developers' projects in a fast-paced manner however, it's not cheap.

New Construction is costly.

High-end housing is the primary reason for the fact that most new developments you see in the marketplace are of high-end quality. This is due to the growing costs of construction labor. Construction labor demand is at an all-time high, and the price of building materials is at their highest ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxurious building or in a budget-friendly building. It's priced the same." As a result of high materials and labor costs and the rise in the value of natural resources, developers are required to construct luxury homes since the numbers don't allow for building anything else. To make sure that affordable housing is available, cities are enforcing regulations that require developers to include affordable units in construction plans. Most often, between 10% and 20% based on the number of units and location. This will not cause an increase in the number of affordable homes.

What are the alternatives to housing that is affordable? Get 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 1990 in various cities across the United States. Although they may seem very out of date compared to what's being built nowadays however, the "bones" are quite good. Buildings built during this time frame were built with modern techniques and materials. They generally only require surface rehabilitation with the replacement of wear and tear items. These apartment communities, and the secondary markets they're in are strategically placed to take on the flood of luxury homes being built and provide housing that's reasonably affordable. The best part about Class B properties is that they tend to are able to perform well in all economic climates. If the economy is flourishing Class C tenants are able to are able to move into Class B homes. If the economy is suffering the Class A tenants will no longer justify the luxury rents and are typically forced to move to Class B properties. Investors can usually purchase these properties for a fraction of the cost to build, which allows them to offer a wonderful home, but keep the rents affordable for tenants with different income levels.
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