CNBC released a report last week that said that the multifamily realty sector is in the midst of an "acute crisis". The article concludes that the upper end of the luxury market is overbuilt and susceptible to a flattening or market correction. Developers of apartments in the 150 largest US towns constructed 395 775 new housing units during the fiscal year. This is an increase of 46% compared to previous years. The majority of the new units of housing are luxury communities. ,Get more info.

When I lived in Boston during the last couple of years, I've witnessed many major developments being built in a rapid manner. As a result, the overwhelming majority of these are high-end luxury apartments that your average citizens are unable to afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing as well as the overabundance luxury housing that doesn't cater to the diverse population of the city.

With the emergence of all of these new luxurious multifamily homes is this putting the entire multifamily market at risk of collapse or flattening? 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 volatility and market imbalances. 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 major reasons for the rising demand for luxurious apartments. Generation Y and empty nester baby boomers are making their way to cities like Boston, Austin, and Denver, with a taste for high-end finishes and luxurious buildings. One of the main reasons for this growth is that lots of double-income households of millennials and empty nesters that can afford to buy are choosing to rent. Facilities like top-of-the-line fitness centers, concierge services and fully-service pet spas are now the norm. With each new building it appears that there is an amenities arms race. These kinds of modern facilities are being integrated into the projects of developers at a rapid pace, but it isn't cheap.

Construction costs are high for new construction.

The main reason why the majority of new residential developments that are on the market is luxury is due to the rising cost of construction labor and materials. Construction is a high-demand industry and the materials are at their highest price ever. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury building or in an affordable construction. It's the same cost. It's the same." Cities are forced to pass laws that force developers to build the right amount of affordable homes within their new construction projects. The number of units and the location will determine much they charge. But these rules alone won't result in a significant increase in the amount of affordable housing.

If Affordable Housing Isn't Built, what is the alternative? Read more here.

Through the years, there has been building boom and bust cycles. There are many apartments built between 1970 and 1990 in various markets across the country. Although these properties might seem out-of-date compared to the current construction however, the "bonesremain in good shape. The buildings built during this time were built using the most modern materials and techniques. They generally only require surface rehabilitation and wear-related items are able to be repaired. These communities, as well as the secondary markets they're located in are strategically placed to take on the flood of new luxury apartments and to maintain housing that's relatively affordable. The best part about Class B homes is that they generally are able to perform well regardless of the economic conditions. When the economy is strong Class C tenants are able to shift to Class B properties. If the economy is weak Class A tenants have to shift to Class B homes. Investors can usually purchase these properties for a fraction of the cost of building and can thus provide a comfortable living space, yet ensure that rents remain at a level attractive to tenants with varying income ranges.
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