CNBC published a report this week that said that the multifamily realty sector is in the midst of an "acute crisis". The article concludes that the top end of the luxury market is overbuilt and susceptible to a flattening or a market correction. Apartment developers in the 150 largest US towns built 395 775 new housing units during the fiscal year. This represents an increase of 46% compared to the previous year. In these new homes, around 75-80% of them are considered to be luxury communities. ,Learn more.

I've witnessed many large developments being built at a rapid pace while living in Boston in recent years. Most of these homes are expensive luxury apartments that most people cannot afford. In actuality there is a reason why the Spotlight Team at the Boston Globe recently published a series of articles that focused on creation of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing, as well as the excess of luxury housing that doesn't cater to its diverse population.

Do these multifamily developments pose a threat to the multifamily sector? The danger of Class A new construction is obvious if the market flattens but the the existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances as well as 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 a couple of major factors driving the increasing demand for luxury homes. Generation Y and baby boomers who are empty-nesters are descending on city centers like Boston, Austin & Denver with a keen interest in luxury finishes and luxurious structures. This growth can be attributed to the reality that empty-nesters and families with double incomes in the millennial generation are opting to rent instead than buy. The latest gyms, concierge services and full-service spas for pets are all becoming the norm. It seems like there is an inordinate quantity of amenities available with every new construction. Developers are aggressively incorporating modern amenities into their projects; however, it doesn't come inexpensively.

The cost of construction can be expensive.

The reason the overwhelming majority of new housing complexes you see coming on the market are luxurious is because of the increasing price of construction labor and building materials. The demand for construction labor is at an all-time high and the price of building materials is at their highest ever been. As 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 construction. It's priced the same." It costs the identical." Cities are having to enact rules that require developers to create an amount of affordable units in their construction projects. Most often, between 10% and 20% based on the number of units and the location. These regulations will not cause an increase in the number of affordable homes.

If Affordable Housing Isn't Constructed, What's the Alternative? Learn more.

Through the years, there has been building booms and busts. You will find many apartments built between 1970 and 1990 in various cities across the United States. Although these properties might seem out-of-date compared to the current construction, the "bones” are still good. These buildings constructed in the frame have been constructed with modern materials and techniques and typically require only surface renovations and wear-related items replaced. These communities, as well as the secondary markets they serve are well placed to counter the influx of luxury homes. They also provide affordable housing. The Class B homes can perform in any economic climate. When the economy is strong Class C tenants are able to shift to Class B properties. When the economy is in decline tenants of Class A are forced to move down to more affordable Class B properties. These properties are often available for less than the cost of building. This permits investors to provide an ideal property to live in while still offering attractive rents that tenants with different income levels can afford.
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