In the last week, CNBC published an article suggesting that "There is an acute crisis coming towards us" in the multifamily real estate industry. The article suggests that the top end of the market for luxury is over-built and prone to a flattening or a market correction. Apartment developers in the largest 150 US towns built 395 775 new housing units last financial year. This is an increase of 46% compared to previous years. Of these new homes, around 75-80% of them are considered to be luxury communities. ,View source.

In my time in Boston over the past few years, I have witnessed several major developments being constructed at a breakneck speed. It's not surprising that the vast majority of these homes are high-end luxury apartments that your average citizens are unable to afford. In actuality, the Spotlight Team at the Boston Globe recently published a number of articles that focused on the creation of the "Seaport" neighborhood. The article highlighted the lack of affordable housing as well as the overabundance of luxury homes which does not serve the diverse population in the city.

With the arrival of all of these new luxury multifamily properties, does this put the entire multifamily industry at risk of flattening or collapse? The danger of Class A new construction is apparent if the market flattens but the existing Class B & C multifamily communities are well-positioned to withstand market imbalances as well as corrections. Let's go through the reasons behind why there's been an increase in luxury and what could happen if demand subsides.

Demand for luxury is on the rise

There are two key drivers behind the increasing demand for luxury homes. Generation Y and empty nester baby boomers are moving into cities such as Boston Austin, Boston, and Denver, with a taste for high-end finishes and luxurious properties. One reason for this growth is that lots of double-income households of millennials and empty nesters with the money to buy are choosing to rent. Perks such as high-end gyms, concierge services, and fully-service pet spas are becoming standard. With every new development, it seems as though there's an arms race. These types of modern amenities are being incorporated into developers' projects at a rapid pace however, it's not cheap.

Construction costs are high for new construction.

Luxury housing is the main reason for the fact that most new developments that are in the marketplace are of high-end quality. This is because of the increasing cost of construction labor. Construction labor demand is at an all-time high, as is the cost of materials is at their highest ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or low-cost ones." It's the same cost. Due to the high cost of prices for labor and materials as well as the appreciation of the raw land developers are required to construct luxury homes due to the fact that the numbers do not allow for building anything else. Cities are forced to pass regulations to force developers to construct a certain number of affordable units in their construction projects. Typically between 10%-20% depending on the unit count and location. This will not lead to an increase in affordable housing.

If Affordable Housing Can't Be Built, what is the alternative? Find out more.

Throughout the decades there have been building boom and bust cycles. You will find many apartments built between 1970 and 1990 in various areas across the United States. Although these homes may appear outdated in comparison to the modern buildings being constructed nowadays, they're "bones" are quite good. Buildings built during this time frame were constructed using modern techniques and materials. They typically only need surface rehabbing and wear-related items replaced. These communities, as well as their secondary markets are well-positioned to offset the flood of luxurious apartments. They also offer affordable housing. The best part about Class B homes is that they typically perform well regardless of the economic conditions. When the economy is thriving Class C tenants can shift to Class B properties When the economy is struggling the Class A tenants will no longer justify the luxury rents, and they typically shift to Class B properties. These homes are usually accessible for less than price of construction. This lets investors offer an ideal location to live in while still offering appealing rents that tenants of different incomes can afford.
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