The week before, CNBC published an article in which they claimed that "There is a crisis of extreme proportions coming towards us" in the multifamily real estate sector. The article concludes that the top end of the luxury market is overbuilt and susceptible to flattening or a market correction. In reality, apartment builders in the largest 150 US cities built 395,775 new housing units last year, which marks a 46% increase Y-o-Y. About 75-80% of these new housing units are luxury communities. ,Discover more.

When I lived in Boston over the past few years, I've witnessed several major developments being constructed at a breakneck speed. The majority of these properties 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 progress of the "Seaport" neighborhood. The article highlighted the lack of affordable housing, as well as an abundance of luxury houses that do not meet the needs of the diverse population of the city.

With the emergence of all these new luxury multifamily properties is this putting the entire multifamily sector at risk of a flattening or even a collapse? The threat to Class A new construction is evident if the market is flat but the existing Class B & C multifamily communities are well-positioned to withstand market imbalances and corrections. Let's look at the reasons for this luxury boom, and what happens if the boom is over.

The Demand for Luxury is High

There are two important factors that drive the demand for luxury apartments. Generation Y and baby boomers who are empty-nesters are moving into cities such as Boston, Austin & Denver with a desire for luxurious finishes and amenities-packed structures. The rise in popularity is due to the reality that empty-nesters and double-income millennial households prefer renting rather than buy. High-end gyms, concierge services and full-service spas for pet owners are becoming more regular. With each new building there is a sense that there's an arms race. Developers are aggressively incorporating these modern perks in their developments, however, it doesn't come inexpensively.

New Construction is Cost Prohibitive

The main reason why the vast majority of the new housing complexes you see that are on the market is expensive is because of the rising price of construction labor and building materials. Construction labor is in high demand and the materials are at their highest ever price. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury building or in an affordable building. It's the same cost. Because of the high cost of labor and materials, and the appreciation of the raw land, developers are forced to build luxury products because the numbers simply don't make sense to construct anything else. Cities are being forced to adopt laws that force developers to create a certain number of affordable units within their construction projects. The average number of units as well as the location will determine how much they charge. The regulations won't cause an increase in affordable housing.

If Affordable Housing isn't Built, What is the Alternative? Get more info.

There have been many boom and bust cycles within the building industry over the decades. There are many apartment buildings built between 1970 and 90 in various markets across the nation. Although these properties might seem old-fashioned compared to modern construction however, the "bonesare still in good condition. Buildings built during this time frame were built with contemporary materials and techniques, and typically only need surface rehabbing and wear-related items replaced. These communities, as well as the secondary markets that they're in, are positioned well to counterbalance the influx of luxury homes being built and to maintain housing that's fairly affordable. The Class B homes can perform in any economic climate. If the economy is flourishing Class C tenants are able to are able to move into Class B properties When the economy is suffering and Class A tenants are unable to no longer justify the luxury rents and are typically forced to move to Class B properties. These homes are usually offered for less than the price of construction. This lets investors offer an ideal property to live in and yet still pay attractive rents that tenants of different income levels can afford.
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