CNBC issued a report this week that said that the multifamily real estate sector is experiencing an "acute crisis". According to the article, the upper-end of the luxury market is too crowded and vulnerable to market declines or flattening. In actuality, apartment developers in the largest 150 US cities constructed 395,775 brand new housing units in the last year, which represents an increase of 46% Y-o-Y. Nearly 75-80% of these new units of housing are luxurious communities. ,Get more info.

I've seen many major developments built at breakneck speed while living in Boston over the last few years. A majority of these developments are luxurious luxury residences that most people cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. The article highlighted its lack of affordable housing as well as an abundance of luxury houses which does not serve the diverse population within the city.

With the emergence of all these new multi-family luxury properties is this putting the entire multifamily industry at risk of flattening or collapse? The danger to Class A new construction is apparent if the market flattens but the the existing Class B & C multifamily communities are uniquely placed to stand up to market imbalances and corrections. Let's examine the causes for this luxury boom, and what happens if the boom ends.

The demand for luxury goods is strong

There are two major reasons to the increasing demand for luxurious apartment. Generation Y and baby boomers who are empty-nesters are descending on city centers like Boston, Austin & Denver with a desire for high-end finishes and amenity-packed buildings. One of the main reasons for this boom is that a lot of double-income households, as well as empty nesters with the money to buy are choosing to rent. High-end gyms, concierge services and spas with full-services for pets are now commonplace. With every new development it appears that there is an amenities arms race. These types of modern amenities are being included in development projects at a rapid pace however, it's not cheap.

New Construction is Cost Prohibitive

Luxury housing is the main reason that the majority of new developments that are on the market are high-end. This is due to the increasing costs of construction labor. Construction labor demand is at an all-time high and the price of building materials is the most they have ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or affordable buildings." It's the same price." It costs the same." Cities are forced to pass regulations to force developers to create an amount of affordable units in their new construction projects. The average unit count and the location will determine how the developers will be able to charge. The regulations won't result in an increase in affordable housing.

If Affordable Housing isn't Built, What is the Alternative? View source.

There have been numerous cycles of boom and bust in the building industry over the decades. In many areas across the country, you will notice large numbers of homes built between the 1970's-1990's. Although they may seem old-fashioned when compared to the buildings that are being built nowadays but the "bones" are quite good. These buildings constructed in the frame have been constructed with contemporary materials and techniques, and typically require only surface renovations with the replacement of wear and tear items. These communities, as well as the secondary markets that they're in, are positioned well to counterbalance the influx of luxury homes being built and to maintain housing that's reasonably affordable. These Class B properties can succeed in any economic situation. When the economy is strong Class C tenants are able to are able to move into Class B homes. When the economy is in decline tenants of Class A are forced to move down to Class B properties. These properties are often offered for less than the cost of building. This lets investors offer an ideal place to call home while still offering attractive rents that tenants of different incomes are able to afford.
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