CNBC issued a report this week that stated that the multifamily real estate sector is experiencing an "acute crisis". According to the article, the luxury market's upper end is too crowded and vulnerable to market corrections or flattening. Apartment developers in the 150 largest US towns built 395 775 new housing units during the fiscal year. This is a 46% increase over previous years. The majority of the new units of housing are luxury communities. ,Read more here.

I've seen a lot of major developments built at breakneck speed during my time in Boston in recent years. Most of these homes are luxury homes that most people cannot afford. In actuality, the Spotlight Team at the Boston Globe recently released a set of pieces that focused on the growth of the "Seaport" neighborhood. The article highlighted the lack of affordable housing, as well as the overabundance of luxury homes that do not meet the needs of the diverse population of the city.

With the advent of all of these new multi-family luxury properties, does this put the entire multifamily sector at risk of collapse or flattening? If the market is flat, there is a risk for Class A new construction. However, the existing Class B & C multifamily communities are able to withstand market fluctuations and imbalances. Let's look at the reasons for this boom in luxury, and what will happen if it comes to an end.

The demand for luxury goods is high.

There are a couple of key drivers behind the demand for luxury apartments. Baby boomers and empty nesters are moving into cities such as Boston, Austin & Denver with a discerning taste for luxury finishes and luxurious buildings. This boom can be attributed to the trend that empty nesters and families with double incomes in the millennial generation are choosing to rent rather than purchase. Luxury gyms, concierge service and spas with full-services for pets are all becoming the norm. There is an appalling amount of amenities being offered in every new building. Developers are actively incorporating modern amenities into their plans, but they're not inexpensively.

New Construction is Cost Prohibitive

The main reason for the fact that most new developments you see in the marketplace are of high-end quality. This is because of the increasing cost of construction work. Construction labor is highly sought-after and the materials are at their highest ever price. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury structures or in affordable ones." It's priced the same." Due to the high cost of cost of labor and materials, and the appreciation of the natural resources developers are being required to construct luxury homes since the numbers don't work to build anything else. Cities are having to enact rules that require developers to create a certain number of affordable units within their new construction projects. Typically between 10%-20% depending on the number of units and the location. These regulations will not lead to an increase in affordable housing.

If Affordable Housing Isn't Built, What is the alternative? Learn more.

Throughout the decades there have been several building booms and busts. There are many apartment buildings built between 1970 and 1990 in various markets across the nation. Although these homes may appear outdated compared to what's being built today but they're "bones" are in good shape. Built during this period were built using the most advanced materials and techniques. They generally only require surface rehabilitation and wear items can be replaced. These apartment communities, and the secondary markets they're in are strategically placed to counterbalance the flood of luxury homes being built and provide housing that's relatively affordable. The Class B homes are able to succeed in any economic situation. When the economy is strong Class C tenants are able to move into Class B properties. When the economy is struggling tenants of Class A are forced to relocate to Class B homes. Investors are able to purchase these properties for only a small portion of the price of construction and can thus provide a great living space, yet ensure that rents remain in a range that is appealing to tenants of many income ranges.
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