The week before, CNBC published an article in which they claimed that "There is an acute crisis that is coming our way" within the multifamily real estate market. According to the report, the luxury market's upper end is too crowded and vulnerable to market fluctuations or flattening. In fact, apartment developers in the largest 150 US cities built 395,775 new housing units in the last year, which is an increase of 46% year-over-year. Of these new units of housing, about 75-80% are considered luxury communities. ,Learn more here.

I've witnessed many large developments built at breakneck speed when I lived in Boston over the last few years. As a result, the overwhelming majority of these properties are luxurious luxury residences which the average citizen are unable to afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing and the overabundance luxury housing that doesn't cater to its diverse population.

With the arrival of all these new luxurious multifamily homes could this put the entire multifamily market at risk of flattening or even a collapse? If the market is flat it could be a problem for Class A new construction. However, the existing Class B & C multifamily communities can stand up to market corrections and imbalances. Let's examine the causes of this luxury boom and what will happen if it ends.

The demand for luxury goods is strong

There are two major reasons of the growing demand for luxurious apartments. Baby boomers and empty nesters are descending on city centers such as Boston, Austin & Denver with a discerning taste for luxury finishes and luxurious properties. This growth can be attributed to the fact that empty nesters and families with double incomes in the millennial generation prefer renting rather than buy. Benefits like high-end fitness centers, concierge services and fully-service pet spas are becoming the standard. It seems like there is an inordinate amount of amenities being offered in every new building. These types of modern amenities are being incorporated into developers' projects rapidly and aren't cheap.

The cost of construction can be expensive.

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 increasing cost of construction work. Construction labor is in high demand and materials are priced at their highest ever price. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxury structure or in a low-cost building. It's priced the same." It costs the same." Cities are forced to pass laws that force developers to construct an amount of affordable homes within their new construction projects. Typically between 10%-20% depending on the unit count and the location. However, these regulations alone do not guarantee a significant growth in affordable housing.

What are the alternatives for affordable housing? Click here.

Throughout the decades there have been building boom and bust cycles. There are many apartments built between 1970 and 1990 in various cities across the country. While these properties may feel old-fashioned when compared to the buildings that are being built nowadays but the "bones" are good. These buildings constructed in the frame have been constructed with modern materials and techniques and generally only require surface rehabilitation and wear-related items replaced. These communities, as well as the secondary markets they serve are well placed to offset the flood of luxury apartments. They also provide affordable housing. These Class B properties are able to thrive in any economic environment. If the economy is robust Class C tenants can are able to move into Class B homes. When the economy is in decline, tenants of Class A are forced to relocate to Class B properties. They are typically accessible for less than cost of building. This permits investors to provide the perfect place to call home while still offering attractive rents that tenants with different income levels are able to afford.
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