This past week, CNBC published an article which suggested that "There is a crisis of extreme proportions coming towards us" within the multifamily real estate market. The article suggests that the top end of the luxury market is overbuilt and vulnerable to a flattening or a market correction. In reality, apartment builders in the largest 150 US cities built 395,775 new housing units last year, which is a 46% increase Y-o-Y. Of these new units of housing, about 75-80% of them are classified as luxury communities. ,Find out more.

While living in Boston over the past few years, I've witnessed several major developments being constructed at a breakneck speed. Not surprisingly, the overwhelming majority of these properties are luxurious luxury residences that your average citizens cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing, as well as the excess of luxury housing that doesn't cater to the diverse population of the city.

With the arrival of all of these new multi-family luxury properties is this putting the entire multifamily sector at risk of a flattening or even a collapse? If the market is flat it could be a problem of a collapse for Class A new construction. However, existing Class B & C multifamily communities can withstand market corrections and imbalances. Let's look at the reasons for this boom in luxury, and what will happen if it ends.

The Demand for Luxury is High

There are two main reasons of the growing demand for luxurious homes. Millennials and empty-nester baby boomers are descending on city centers such as Boston, Austin & Denver with a keen interest in high-end finishes and amenity-packed structures. The rise in popularity is due to the fact that empty nesters and double-income millennial households are choosing to rent rather to purchase. The latest gyms, concierge services and spas with full-services for pets are becoming more the norm. With each new building there is a sense that there's an arms race. Developers are actively incorporating these types of modern perks in their developments, however they're not inexpensively.

New Construction is Cost Prohibitive

The main reason why the vast majority of the new homes coming on the market are luxury is due to the increasing cost of construction labor and materials. The demand for construction labor is at an all-time high and the cost of materials is at their highest ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury structures or in affordable ones." It's exactly the same price. It costs the same." To provide affordable housing cities are now enforcing laws that require developers to include affordable units in new construction projects. The average unit count and the location determines how much they charge. The regulations won't result in an increase in the number of affordable homes.

If Affordable Housing isn't Built, what is the Alternative? Go here.

Through the years, there have been several building boom and bust cycles. There are many apartments built between 1970 and 90 in various cities across the United States. Although these homes may appear very out of date when compared to the buildings that are being built in the present but they're "bones" are good. Buildings built during this time frame have been constructed with contemporary materials and techniques, and generally only require surface rehabilitation and wear-related items replaced. These communities and their secondary markets are well placed to offset the flood of luxurious apartment buildings. They also provide affordable housing. The great thing about these Class B homes is that they generally excel in all economic climates. When the economy is strong Class C tenants can move up into Class B homes. If the economy is struggling, Class A tenants can not afford the high rents and are typically forced to move to class B properties. Investors are able to purchase these properties for only a small portion of the cost of building and can thus provide a comfortable place to live yet still maintain rents at a level attractive to tenants of many income levels.
There are no comments on this page.
Valid XHTML :: Valid CSS: :: Powered by WikkaWiki