The week before, CNBC published an article in which they claimed that "There is an acute crisis headed our way" in the multifamily real estate industry. The article concludes that the upper tier of the luxury market is overbuilt and vulnerable to a flattening or market correction. In reality, apartment builders in the largest 150 US cities delivered 395,775 new housing units in the last year, which is a 46% increase Y-o-Y. In these new homes, around 75-80% are considered luxury communities. ,Learn more here.

I've witnessed many large development projects being constructed at an incredible pace when I lived in Boston over the last few years. As a result, the overwhelming majority of these are high-end luxury apartments which the average citizen cannot afford. In fact, the Spotlight Team at the Boston Globe recently published a number of pieces that focused on the development of the new "Seaport" neighborhood. It highlighted the city's lack of affordable housing, as well as the overabundance luxury housing that don't meet the needs of the diverse population of the city.

With the advent of all of these new luxurious multifamily homes could this put the entire multifamily industry at risk of a flattening or collapse? The danger to Class A new construction is apparent if the market flattens, however; the existing Class B & C multifamily communities are well-positioned to stand up to market imbalances and corrections. Let's examine the causes for this boom in luxury, and what will happen if it is over.

The demand for luxury goods is strong

There are two key drivers behind the demand for luxury apartments. Generation Y and baby boomers who are empty-nesters are descending on city centers such as Boston, Austin & Denver with a desire for luxury finishes and luxurious structures. One specific reason for this boom is that many double income households of millennials and empty nesters who can afford to purchase are choosing to rent. Perks such as high-end fitness centers, concierge services, and pet spas that are full-service are now the norm. There's an astonishing number of amenities offered with each new building. These kinds of modern amenities are being incorporated into the projects of developers at a rapid pace however, it's not cheap.

New Construction is costly.

The main reason that the majority of new developments that are in the marketplace are of high-end quality. This is due to the growing cost of construction labor. Construction labor demand is at an all-time high, as is the cost of building materials is the most they have ever been. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't need to be in high-end buildings or affordable buildings." It's the same price. Because of the high cost of labor and materials, and the appreciation of the natural resources developers are being required to construct luxury homes because the numbers simply don't work to build any other type of construction. Cities are being forced to adopt laws that force 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. This will not lead to an increase in the number of affordable homes.

If Affordable Housing isn't Constructed, What's the Alternative? Visit here.

Throughout the decades there have been building boom and bust cycles. You will find many apartments built between 1970 and 1990 in various cities across the country. While they may seem old-fashioned compared to modern construction but the "bones” are still good. The buildings built in the frame have been constructed with contemporary materials and techniques, and generally only require surface rehabilitation with the replacement of wear and tear items. These communities, as well as the secondary markets they're located in, are positioned well to counterbalance the flood of new luxury apartments and maintain housing that is fairly affordable. The benefit of these Class B properties is that they tend to perform well across all economic climates. If the economy is robust, Class C tenants shift to Class B properties. If the economy is in decline tenants of Class A are forced to move down to more affordable Class B homes. They are typically accessible for less than cost of building. This allows investors to offer an ideal property to live in while still offering appealing rents that tenants of different incomes can afford.
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