This past week, CNBC published an article suggesting that "There is an urgent crisis coming towards us" in the multifamily real estate industry. The article surmises that the upper tier of the market for luxury is over-built and prone to a flattening or a market correction. Apartment developers in the top 150 US towns built 395 775 new housing units in the last fiscal year. This represents an increase of 46% over the previous year. Of the new homes, around 75-80% are considered to be luxury communities. ,Visit here.

In my time in Boston during the last couple of years, I have witnessed many major developments being built at a breakneck speed. Not surprisingly, the overwhelming majority of these homes are high-end luxury apartments that the average person cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. The article highlighted its lack of affordable housing and an abundance of luxury houses that do not meet the needs of the diverse population in the city.

Are these multifamily developments a threat to the multifamily industry? If the market slows down it could be a problem of a collapse for Class A new construction. However the existing Class B & C multifamily communities can stand up to market volatility and market imbalances. Let's look at the reasons of this luxury boom and what happens if it ends.

Demand for luxury is on the rise

There are a few key drivers behind the increasing demand for luxury homes. Generation Y and empty nester baby boomers are making their way to cities like Boston and Austin as well as Denver with a discerning palate for high-end finishes and luxurious structures. One specific reason for this growth is that a lot of double-income households, as well as empty nesters that can afford to buy are opting to rent. High-end gyms, concierge services and full-service spas for pet owners are now regular. With each new building there is a sense that there's an arms race. These kinds of modern amenities are being incorporated into the projects of developers at a rapid pace, but it isn't cheap.

New Construction is costly.

Luxury housing is the main reason why the majority of new developments you see on the market are expensive. This is due to the growing costs of construction labor. Construction labor is in high demand and materials are priced at their highest price ever. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't need to be in high-end buildings or low-cost ones." It's exactly the same price. Due to the high cost of materials and labor costs and the appreciation of the natural resources developers are being obliged to build luxurious products due to the fact that the numbers do not allow for building anything else. To provide affordable housing cities are enforcing rules which require developers to build affordable units within their new construction projects. The number of units and the location will determine how the developers will be able to charge. But, on their own, these rules won't result in a significant growth in affordable housing.

What are the alternatives for affordable housing? Read more here.

There have been many boom and bust cycles within the building industry over the years. There are many apartment buildings built between 1970 and 90 in various areas across the United States. Although they may seem old-fashioned in comparison to the modern buildings being constructed in the present, they're "bones" are quite good. Buildings built during this time frame have been constructed with contemporary materials and techniques, and generally only require surface rehabilitation with the replacement of wear and tear items. 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 maintain housing that is relatively affordable. The benefit of these Class B properties is that they tend to perform well across all economic climates. When the economy is thriving Class C tenants are able to shift to Class B properties When the economy is in decline and Class A tenants are unable to find it difficult to justify the extravagant rents and are typically forced to move to more affordable class B properties. Investors can typically buy these homes for less than the price of construction, which allows them to provide a great living space, yet ensure that rents remain at a level attractive to tenants of many income levels.
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