CNBC published a report this week that stated that the multifamily realty market is experiencing an "acute crisis". The article suggests that the upper end of the luxury market is overbuilt and vulnerable to a flattening or market correction. In fact, apartment developers in the 150 largest US cities constructed 395,775 brand new housing units in the last year, which marks a 46% increase Y-o-Y. Of the new housing units, nearly 75-80% are considered luxury communities. ,More info.

While living in Boston during the last couple of years, I've witnessed many major developments being built in a rapid manner. The majority of these properties are expensive luxury apartments which the majority of people can't afford. In actuality it was the Spotlight Team at the Boston Globe recently published a series of pieces 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 that do not meet the needs of the diverse population in the city.

With the advent of all of these new multi-family luxury properties, does this put the entire multifamily sector at risk of a collapse or flattening? If the market slows down, there is a risk of a collapse for Class A new construction. However the existing Class B & C multifamily communities can stand up to market volatility and market imbalances. Let's look at the reasons why there has been such a luxury boom and what could happen if demand subsides.

Demand for luxury is on the rise

There are a few important factors that drive the demand for luxury apartments. Millennials and empty nester baby boomers are moving to cities like Boston and Austin as well as Denver. They have a keen taste for luxury finishes and amenities-packed properties. The rise in popularity can be attributed to the trend that empty nesters and households with double incomes are choosing to rent rather to purchase. The latest gyms, concierge services and full-service spas for pet owners are becoming more the norm. There is an astonishing number of amenities offered with every new construction. These kinds of modern amenities are being included in development projects rapidly however, it's not cheap.

The cost of construction can be expensive.

High-end housing is the primary reason that the majority of new developments you see in the marketplace are of high-end quality. This is due to the increasing cost of construction work. The demand for construction work is at an all-time high, as is the cost of building materials is at their highest ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxurious building or in a low-cost construction. It costs the same." It costs the same." To ensure affordable housing cities are now enforcing laws that require developers to include affordable units in construction plans. Most often, between 10% and 20% based on unit count and location. But these rules alone won't result in a significant growth in affordable housing.

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There have been numerous cycles of boom and bust in the building industry throughout the years. There are many apartment buildings constructed between 1970 and 1990 in various markets across the nation. While these homes may appear old-fashioned compared to modern construction however, the "bones” are still good. These buildings constructed in the frame were constructed using contemporary materials and techniques, and generally only require surface rehabilitation with the replacement of wear and tear items. These communities, as well as the secondary markets they're located in are well-positioned to take on the flood of luxury new homes and to maintain housing that's fairly affordable. These Class B properties can perform in any economic climate. When the economy is strong, Class C tenants shift to Class B homes. If the economy is struggling and Class A tenants are unable to not afford the high rents and typically move down to more affordable Class B properties. Investors can usually purchase these properties for only a small portion of the cost to build, which allows them to provide a great home, but keep the rents in a range that is appealing to tenants of many income ranges.
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