CNBC issued a report this week that said that the multifamily realty sector is facing an "acute crisis". According to the article, the upper-end of the luxury market is too crowded and vulnerable to market fluctuations or flattening. In fact, apartment developers in the 150 largest US cities built 395,775 new housing units last year, which marks an increase of 46% Y-o-Y. In these new homes, around 75-80% of them are classified as luxury communities. ,Go here.

I've seen a lot of major developments being built at a rapid pace when I lived in Boston over the last few years. The majority of these properties are luxurious luxury residences that most people cannot afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article highlighted its lack of affordable housing and an abundance of luxury houses that does not cater to the diverse population in the city.

With the emergence of all these luxury multifamily properties, does this put the entire multifamily industry at risk of flattening or even a collapse? The threat to Class A new construction is apparent if the market flattens, however; existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances and corrections. Let's examine the causes for this luxury boom, and what happens if it ends.

Luxury demand is strong

There are two main drivers of the growing demand for luxurious homes. Millennials and empty nester baby boomers are moving to cities such as Boston and Austin as well as Denver. They have a keen taste for luxury finishes and amenities-packed properties. This boom is due to the reality that empty-nesters and families with double incomes in the millennial generation are choosing to rent rather than buy. Benefits like high-end fitness centers, concierge services and fully-service pet spas are becoming standard. There's an astonishing number of amenities offered with each new building. These kinds of modern facilities are being integrated into the projects of developers at a rapid pace and aren't cheap.

New construction is expensive.

The main reason why the overwhelming majority of new homes coming on the market are luxury is due to the rising price of construction materials and labor. Construction labor is in high demand and materials are priced at their highest price ever. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or affordable buildings." It's priced the same." It costs the identical." Cities are having to enact laws that force developers to construct a certain number of affordable units within their new construction projects. The average number of units as well as the location will determine much they charge. This will not result in an increase in affordable housing.

What alternatives are there to affordable housing? Get more info.

Through the years, there have been building boom and bust cycles. In many areas across the country, you'll see a lot of apartments constructed between the 1970's-1990's. While these properties may feel very out of date compared to what's being built today however, the "bones" are quite good. Built during this period were constructed using advanced materials and techniques. They usually need only surface repairs and wear and tear items can be repaired. These communities as well as the secondary markets they serve are well placed to counteract the overflow of luxurious homes. They also offer affordable housing. These Class B properties can perform in any economic climate. If the economy is robust Class C tenants can are able to move into Class B homes. When the economy is struggling Class A tenants are forced to move down to more affordable Class B homes. Investors are able to purchase these properties at less than the price of construction, which allows them to provide a comfortable home, but ensure that rents remain affordable to tenants with varying income ranges.
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