CNBC issued a report this week stating that the multifamily real estate sector is in the midst of an "acute crisis". The article concludes that the top end of the market for luxury is over-built and prone to a flattening or market correction. Apartment developers in the largest 150 US towns built 395 775 new housing units during the fiscal year. This represents an increase of 46% over previous years. Nearly 75-80% of these new housing units are luxury communities. ,Read more.

I've witnessed many large development projects being constructed at an incredible pace while living in Boston in recent years. A majority of these developments are luxurious luxury residences which the majority of people can't afford. In fact, the Spotlight Team at the Boston Globe recently published a series of pieces that focused on the development of the new "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 these new multi-family luxury properties is this putting the entire multifamily market at risk of flattening or even a collapse? The danger to Class A new construction is apparent if the market flattens but the existing Class B & C multifamily communities are well-positioned to withstand market imbalances as well as corrections. Let's examine the reasons for such a luxury boom and what will happen if demand subsides.

The demand for luxury goods is strong

There are two main reasons for the rising demand for luxurious apartment. Baby boomers are moving into cities such as Boston and Austin as well as Denver with a discerning palate for high-end finishes and luxurious structures. The rise in popularity can be attributed to the reality that empty-nesters and double-income millennial households are choosing to rent rather than purchase. Benefits like high-end fitness centers, concierge services, and pet spas that are full-service are becoming standard. Every time a new construction is completed there is a sense that there's an arms race. Modern facilities are being integrated into development projects rapidly and aren't cheap.

New Construction is Cost Prohibitive

High-end housing is the primary reason for the fact that most new developments you see in the marketplace are of high-end quality. This is due to the growing cost of construction labor. Construction is a high-demand industry and materials are priced at their highest ever price. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury building or in a low-cost building. It's the same price." Because of the high cost of labor and materials, and the appreciation of the raw land, 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 provide affordable housing cities are now enforcing laws which require developers to build affordable units in new construction projects. Typically between 10%-20% depending on unit count and the location. These regulations will not lead to an increase in housing for the poor.

If Affordable Housing isn't Built, what is the alternative? Learn more here.

There have been numerous boom and bust cycles in the construction industry over the years. There are many apartments built between 1970 and 90 in various areas across the United States. While they may seem outdated compared to current construction, the "bones” are still good. The buildings built during this time were built using the most modern techniques and materials. They usually just require minor repairs, and wear and tear items can be repaired. These communities, as well as the secondary markets they serve are well-positioned to offset the flood of luxury homes. They also offer affordable housing. The best part about Class B properties is that they tend to perform well regardless of the economic conditions. When the economy is thriving Class C tenants can move up into Class B homes. If the economy is suffering and Class A tenants are unable to no longer justify the luxury rents, and they typically shift to more affordable class B properties. These homes are usually available for less than the cost of building. This allows investors to offer the perfect property to live in and still maintain attractive rents that tenants with different income levels are able to afford.
There are no comments on this page.
Valid XHTML :: Valid CSS: :: Powered by WikkaWiki