CNBC issued a report this week stating that the multifamily realty market is experiencing an "acute crisis". According to the report the luxury market's upper end is crowded and prone to market fluctuations or flattening. In actuality, apartment developers in the top 150 US cities constructed 395,775 brand new housing units last year, which is an increase of 46% year-over-year. The majority of the new units of housing are luxury communities. ,Read more.

I've seen a lot of major development projects being constructed at an incredible pace while living in Boston in recent years. Most of these homes are luxury homes which the majority of people can't afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. The article pointed out the absence of affordable housing, as well as an abundance of luxury houses which does not serve the diverse population of the city.

With the arrival of all of these new luxury multifamily properties, does this put the entire multifamily market at risk of a collapse or flattening? The danger to Class A new construction is apparent if the market flattens but the the existing Class B & C multifamily communities are well-positioned to withstand market imbalances and corrections. Let's examine the reasons for such a luxury boom and what happens in the event that demand declines.

Demand for luxury is on the rise

There are two main drivers of the growing demand for luxury apartment. Generation Y and baby boomers who are empty-nesters are flocking to city centers like Boston, Austin & Denver with a discerning taste for luxury finishes and luxurious properties. One reason for this growth is that lots of double-income households, as well as empty nesters who can afford to purchase are choosing to rent. Facilities like top-of-the-line gyms, concierge services and pet spas that are full-service are becoming standard. With every new development there is a sense that there is an amenities arms race. Developers are actively incorporating modern amenities into their plans, but, it doesn't come cheap.

New Construction is Cost Prohibitive

High-end housing is the primary reason that the majority of new developments that are in the marketplace are of high-end quality. This is due to the growing cost of construction work. Construction labor is highly sought-after and materials are at their highest price ever. 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 low-cost building. It costs the same." Due to the high cost of cost of labor and materials, and the rising value of the natural resources developers are forced to build luxury products due to the fact that the numbers do not make sense to construct any other type of construction. To make sure that affordable housing is available cities are enforcing rules that require developers to incorporate affordable units in their construction plans. Typically between 10%-20% depending on the unit count and the location. But, on their own, these rules won't result in a significant growth in affordable housing.

What alternatives are there for affordable housing? Learn more.

Over the past few decades, there has been building booms and busts. In many areas across the country, you will find a large number of apartment buildings built in the 1970's-1990's. While these properties may feel outdated compared to what's being built in the present, they're "bones" are good. The buildings built during this time were built using the most modern materials and techniques. They typically just require minor repairs, and wear and tear items can be repaired. These apartment communities, and the secondary markets that they're in, are positioned well to counterbalance the influx of luxury new homes and maintain housing that is relatively affordable. These Class B properties are able to succeed in any economic situation. When the economy is thriving Class C tenants can move up into Class B properties When the economy is struggling the Class A tenants will not afford the high rents and are typically forced to move to Class B properties. These properties are often available for less than the cost of building. This lets investors offer the perfect place to call home while still offering attractive rents that tenants of different income levels can afford.
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