CNBC issued a report this week stating that the multifamily realty market is experiencing an "acute crisis". According to the report, the market's luxury end is overcrowded and susceptible to market declines or flattening. In actuality, apartment developers in the top 150 US cities constructed 395,775 brand new housing units last year, which marks an increase of 46% year-over-year. Of the new homes, around 75-80% are considered to be luxury communities. ,Click here.

While living in Boston over the past few years, I've seen many major developments being built in a rapid manner. A majority of these developments 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 growth of the "Seaport" neighborhood. The article pointed out the absence of affordable housing as well as an overabundance of luxury housing which does not serve the diverse population within the city.

Are these multifamily developments a threat to the multifamily market? The threat of Class A new construction is evident if the market is flat but existing Class B & C multifamily communities are well-positioned to stand up to market imbalances and corrections. Let's look at the reasons the reasons for such an unprecedented growth in the luxury market and what happens when demand slows.

Luxury demand is strong

There are a couple of important factors that drive the increasing demand for luxury homes. Baby boomers and empty nesters are flocking to city centers like Boston, Austin & Denver with a desire for luxurious finishes and amenities-packed buildings. One reason to this increase is that lots of double-income households of millennials and empty nesters who can afford to purchase are choosing to rent. Luxury gyms, concierge service and spas with full-services for pets are all becoming commonplace. There's an astonishing quantity of amenities available in every new building. Developers are rushing to incorporate these modern perks into their projects; however they're not cheap.

New construction is expensive.

Luxury housing is the main reason for the fact that most new developments you see on the market are expensive. This is because of the increasing cost of construction work. Construction labor is highly sought-after and materials are at their highest ever price. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or low-cost ones." It's the same price. It costs the identical." To make sure that affordable housing is available cities are enforcing rules which require developers to build affordable units within their new construction projects. Typically between 10%-20% depending on unit count and the location. This will not cause an increase in affordable housing.

What are the alternatives to housing that is affordable? Click this link.

Throughout the decades there has been building booms and busts. You will find many apartments built between 1970 and 90 in various markets across the country. While these properties may feel very out of date compared to what's being built today, the "bones" are good. The buildings built in the frame were constructed using modern materials and techniques and typically only need surface rehabbing with wear items replaced. These communities, as well as the secondary markets that they're in are well-positioned to counterbalance the flood of luxury homes being built and provide housing that's fairly affordable. These Class B properties are able to perform in any economic climate. If the economy is robust Class C tenants are able to are able to move into Class B homes. If the economy is in decline Class A tenants are forced to relocate to more affordable Class B homes. They are typically accessible for less than cost of building. This permits investors to provide an ideal place to call home and yet still pay attractive rents that tenants with different income levels can afford.
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