CNBC published a report this week that stated that the multifamily realty market is facing an "acute crisis". According to the report the market's luxury end is overcrowded and susceptible to market fluctuations or flattening. In reality, apartment builders in the top 150 US cities constructed 395,775 brand new housing units in the last year, which marks a 46% increase Y-o-Y. Of the new homes, around 75-80% of them are classified as luxury communities. ,Read more here.

I've witnessed many large development projects being constructed at an incredible pace while living in Boston for the past few years. As a result, the overwhelming majority of these are luxurious luxury residences that your average citizens are unable to afford. In reality there is a reason why the Spotlight Team at the Boston Globe recently published a series of articles that focused on the development of the new "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing as well as the overabundance luxury housing which doesn't accommodate its diverse population.

Are these multifamily developments a threat to the multifamily market? The risk to Class A new construction is obvious if the market flattens 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 if demand subsides.

The Demand for Luxury is High

There are two main drivers of the growing demand for luxurious apartment. Millennials and empty nester baby boomers are making their way to cities such as Boston and Austin as well as Denver. They have a keen taste for luxurious finishes and amenities-packed structures. One of the main reasons to this increase is that lots of double-income millennial households and empty nesters who can afford to buy are opting to rent. High-end gyms, concierge services and full-service spas for pets are becoming more the norm. There's an appalling number of amenities offered in every new building. Modern amenities are being included in development projects in a fast-paced manner however, it's not cheap.

New construction is expensive

The reason the majority of new residential developments being put up for sale is luxury is due to the increasing price of construction labor and materials. Construction is a high-demand industry and materials are at their highest price ever. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxurious building or in a budget-friendly structure. It's exactly the same price. It's the same." Cities are being forced to adopt regulations to force developers to construct an amount of affordable units within their new construction projects. The average number of units as well as the location determines how much they charge. The regulations won't lead to an increase in the number of affordable homes.

If Affordable Housing Isn't Built, what is the Alternative? Get more info.

Over the past few decades, there have been several building booms and busts. In many markets around the country, you'll notice large numbers of apartment buildings built in the 1970's-1990's. While they may seem old-fashioned compared to modern construction however, the "bonesremain in good shape. These buildings constructed in the frame were constructed using contemporary materials and techniques, and generally only require surface rehabilitation with wear items replaced. These communities and their secondary markets are well-positioned to offset the flood of luxury homes. They also provide affordable housing. These Class B properties are able to perform in any economic climate. When the economy is strong, Class C tenants move into Class B properties. When the economy is struggling tenants of Class A have to shift to Class B homes. Investors can typically purchase these properties for a fraction of the price of construction and can thus offer a wonderful home, but maintain rents at a level attractive to tenants with varying income levels.
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