This past week, CNBC published an article in which they claimed that "There is an acute crisis headed our way" in the multifamily real estate market. According to the article the market's luxury end is too crowded and vulnerable to market declines or flattening. In fact, apartment developers in the top 150 US cities delivered 395,775 new housing units last year, which represents an increase of 46% Y-o-Y. Of the new units of housing, about 75-80% of them are classified as luxury communities. ,Home page.

When I lived in Boston in the last few years, I've seen numerous major developments being constructed in a rapid manner. Not surprisingly, the overwhelming majority of these homes are luxury homes which the average citizen can't afford. In actuality, the Spotlight Team at the Boston Globe recently released a set of pieces that focused on the development of the new "Seaport" neighborhood. It highlighted the city's shortage of affordable housing and the excess of luxury housing which doesn't accommodate its diverse population.

With the emergence of all of these new luxurious multifamily homes is this putting the entire multifamily sector at risk of a collapse or flattening? The risk of Class A new construction is apparent if the market flattens but the the existing Class B & C multifamily communities are well-positioned to withstand market imbalances as well as corrections. Let's take a look at the motives for this luxury boom, and what will happen if it is over.

Luxury demand is strong

There are two important factors that drive the rising demand for luxury apartments. Millennials and empty nester baby boomers are moving to cities like Boston and Austin as well as Denver. They have a keen taste for luxury finishes and amenities-packed buildings. The rise in popularity can be attributed to the trend that empty nesters and households with double incomes prefer renting rather than buy. Luxury gyms, concierge service and full-service spas for pets are becoming more commonplace. There's an appalling number of amenities offered in every new building. Developers are aggressively incorporating modern amenities in their developments, however they're not at a cost.

Construction costs are high for new construction.

The main reason why the majority of new housing complexes you see coming on the market are luxury is due to the ever-rising costs of construction labor and materials. Construction labor is in high demand and the 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 luxury structure or in a low-cost structure. It's the same cost. Because of the high materials and labor costs and the rising value of the raw land developers are obliged to build luxurious products due to the fact that the numbers do not work to build anything else. Cities are forced to pass rules that require developers to build a certain number of affordable homes within their new construction projects. Most often, between 10% and 20% based on unit count and location. This will not lead to an increase in housing for the poor.

If Affordable Housing isn't Built, what is the alternative? Read more.

Over the past few decades, there has been building booms and busts. In many markets around the country, you'll see a lot of homes built between the 1970's and 1990's. Although these properties might seem out-of-date compared to the current construction but the "bonesare still in good condition. Buildings built during this time frame have been constructed with contemporary materials and techniques, and typically only need surface rehabbing with the replacement of wear and tear items. These communities, as well as the secondary markets they're in are strategically placed to counterbalance the flood of new luxury apartments and provide housing that's reasonably affordable. These Class B properties can perform in any economic climate. When the economy is thriving Class C tenants are able to shift to Class B homes. If the economy is suffering and Class A tenants are unable to not afford the high rents, and they typically shift to more affordable class B properties. They are typically available for less than the price of construction. This permits investors to provide an ideal property to live in while still offering attractive rents that tenants of different incomes are able to afford.
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