The week before, CNBC published an article suggesting that "There is a crisis of extreme proportions that is coming our way" in the multifamily real estate sector. The article surmises that the upper end of the luxury market is over-built and prone to flattening or a market correction. Developers of apartments in the top 150 US towns delivered 395 775 housing units in the last fiscal year. This represents a 46% increase over the previous year. Of these new housing units, nearly 75-80% are classified as luxury communities. ,More info.

While living in Boston in the last few years, I've seen numerous major developments being constructed in a rapid manner. Most of these homes are luxury homes which the majority of people can't afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article pointed out the absence of affordable housing and an overabundance of luxury housing that do not meet the needs of the diverse population in the city.

Do these multifamily developments pose danger to the multifamily industry? If the market slows down it could be a problem of a collapse for Class A new construction. However, existing Class B & C multifamily communities are able to withstand market fluctuations and imbalances. Let's examine the causes of this luxury boom and what happens if it is over.

The demand for luxury goods is strong

There are two major factors driving the increasing demand for luxury homes. Millennials and empty nester baby boomers are making their way to cities like Boston Austin, Boston, and Denver. They have a keen taste for high-end finishes and luxurious structures. This boom is due to the trend that empty nesters and double-income millennial households are opting to rent instead than buy. High-end gyms, concierge services and full-service spas for pet owners are becoming more commonplace. Every time a new construction is completed it appears that there is an amenities arms race. Developers are actively incorporating these modern perks in their developments, however it's not inexpensively.

New construction is expensive.

The primary reason for the majority of new residential developments being put up for sale is expensive is because of the ever-rising price of construction labor and building materials. The demand for construction labor is at an all-time high and the cost of building materials is the most they have ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxurious building or in an affordable building. It's the same price. Because of the high cost of labor and materials, and the appreciation of the natural resources, developers are obliged to build luxurious products because the numbers simply don't work to build anything else. Cities are forced to pass rules that require developers to construct an amount of affordable homes within their new construction projects. Most often, between 10% and 20% based on the unit count and the location. The regulations won't lead to an increase in housing for the poor.

What are the alternatives to affordable housing? Going here.

Through the years, there have been several building booms and busts. You will find many apartments constructed between 1970 and 1990 in various cities across the country. Although they may seem very out of date when compared to the buildings that are being built nowadays but they're "bones" are good. Buildings built during this time frame have been constructed with modern techniques and materials. They typically only need surface rehabbing with wear items replaced. These communities and the secondary markets they serve are well placed to counter the influx of luxurious homes. They also provide affordable housing. These Class B properties can succeed in any economic situation. When the economy is thriving, Class C tenants are able to move into Class B homes. If the economy is struggling and Class A tenants are unable to find it difficult to justify the extravagant rents, and they typically shift to Class B properties. Investors are able to purchase these properties for only a small portion of the cost to build, which allows them to provide a comfortable home, but maintain rents in a range that is appealing to tenants of many income ranges.
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