CNBC published a report this week that stated that the multifamily realty market is facing an "acute crisis". According to the article, the upper-end of the luxury market is crowded and prone to market declines or flattening. Developers of apartments in the largest 150 US towns built 395 775 housing units during the fiscal year. This represents an increase of 46% compared to previous years. In these new housing units, nearly 75-80% of them are classified as luxury communities. ,Read this.

In my time in Boston during the last couple of years, I've seen numerous major developments being constructed at an incredibly rapid pace. Most of these homes are luxury homes which the majority of people can't afford. In fact it was the Spotlight Team at the Boston Globe recently published a number of pieces that focused on the creation of the "Seaport" neighborhood. The article highlighted its lack of affordable housing and the overabundance of luxury homes that does not cater to the diverse population of the city.

Do these multifamily developments pose danger to the multifamily market? The risk to Class A new construction is evident if the market is flat, however; the existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances and corrections. Let's look at the reasons of this luxury boom and what will happen if it comes to an end.

The Demand for Luxury is High

There are two main drivers to the increasing demand for luxury apartments. Generation Y and baby boomers who are empty-nesters are flocking to city centers such as Boston, Austin & Denver with a desire for high-end finishes and amenity-packed buildings. This boom can be attributed to the reality that empty-nesters and double-income millennial households are choosing to rent rather than purchase. Perks such as high-end gyms, concierge services and full-service pet spas are becoming standard. It seems like there is an astonishing number of amenities offered with each new building. These kinds of modern amenities are being incorporated into development projects in a fast-paced manner however, it's not cheap.

New construction is expensive.

The primary reason for the vast majority of the new homes being put up for sale is luxury is due to the rising costs of construction labor and materials. Construction labor demand is at an all-time high and the cost of building materials is the most they have ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury structure or in a budget-friendly building. It's the same price. As a result of high cost of labor and materials, and the rising value of the natural resources, developers are required to construct luxury homes since the numbers don't make sense to construct any other kind of building. Cities are having to enact rules that require developers to create the right amount of affordable homes within their new construction projects. The average unit count and the location will determine much they will charge. The regulations won't cause an increase in affordable housing.

What are the alternatives to affordable housing? Learn more.

There have been numerous cycles of boom and bust within the construction industry over the decades. In numerous markets across the country, you will see a lot of apartment buildings built in the 1970's-1990's. Although these homes may appear outdated compared to what's being built today but the "bones" are good. These buildings were built using the most modern techniques and materials. They usually need only surface repairs and wear items can be repaired. These communities, as well as the secondary markets they serve are well placed to offset the flood of luxurious apartments. They also provide affordable housing. The best part about Class B properties is that they tend to perform well in all economic climates. When the economy is strong Class C tenants are able to shift to Class B homes. If the economy is struggling the Class A tenants will no longer justify the luxury rents and typically move down to class B properties. Investors are able to buy these homes for less than the cost to build, which allows them to provide a great place to live yet still maintain rents in a range that is appealing to tenants of many income ranges.
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