The week before, CNBC published an article suggesting that "There is an acute crisis that is coming towards us" within the multifamily real estate industry. According to the report the luxury market's upper end is overcrowded and susceptible to market declines or flattening. In reality, apartment builders in the top 150 US cities delivered 395,775 new housing units last year, which represents an increase of 46% Y-o-Y. Nearly 75-80% of these new homes are in luxury communities. ,Visit here.

I've seen many major development projects being constructed at an incredible pace during my time in Boston over the last few years. The majority of these properties are luxury homes that most people cannot afford. In reality it was the Spotlight Team at the Boston Globe recently released a set of pieces that focused on the creation of the "Seaport" neighborhood. The article highlighted the lack of affordable housing and the overabundance of luxury homes which does not serve the diverse population of the city.

With the advent of all these luxury multifamily properties, does this put the entire multifamily industry at risk of flattening or even a collapse? The danger of Class A new construction is apparent if the market flattens, however; the existing Class B & C multifamily communities are uniquely placed to stand up to market imbalances and corrections. Let's examine why there has been such an increase in luxury and what will happen if demand subsides.

Luxury demand is strong

There are two important factors that drive the rising demand for luxury apartments. Baby boomers and empty nesters are flocking to city centers like Boston, Austin & Denver with a discerning taste for high-end finishes and amenity-packed buildings. This boom is due to the trend that empty nesters and double-income millennial households are opting to rent instead than buy. Facilities like top-of-the-line gyms, concierge services and full-service pet spas are becoming standard. There's an astonishing number of amenities offered in every new building. These kinds of modern amenities are being included in developers' projects rapidly, but it isn't cheap.

New Construction is costly.

Luxury housing is the main reason that the majority of new developments that are on the market are expensive. This is due to the growing cost of construction work. Construction labor demand is at an all-time high, and the price of building materials is at the highest they've ever been. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious buildings or affordable buildings." It's the same price. Because of the high materials and labor costs and the rise in the value of natural resources, developers are obliged to build luxurious products since the numbers don't work to build any other kind of building. Cities are having to enact laws that force developers to create a certain number of affordable units in their construction projects. The number of units and the location will determine the developers will be able to charge. This will not cause an increase in the number of affordable homes.

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

Over the past few decades, there have been several building boom and bust cycles. In numerous markets across the country, you'll see a lot of homes built between the 1970's and 1990's. While these properties may feel old-fashioned in comparison to the modern buildings being constructed today but they're "bones" are in good shape. The buildings built during this time were built using the most modern materials and techniques. They generally need only surface repairs and wear-related items are able to be repaired. These communities, as well as the secondary markets they're in are well-positioned to counterbalance the flood of luxury new homes and to maintain housing that's fairly affordable. The Class B homes are able to thrive in any economic environment. When the economy is strong Class C tenants are able to move into Class B properties. When the economy is weak, tenants of Class A are forced to move down to Class B homes. Investors can usually purchase these properties for a fraction of the price of construction they can provide a great place to live yet still maintain rents at a level attractive to tenants of many income levels.
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