CNBC issued a report this week that said that the multifamily realty sector is in the midst of an "acute crisis". The article suggests that the upper tier of the luxury market is over-built and prone to flattening or a market correction. In actuality, 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 these new housing units, nearly 75-80% are considered to be luxury communities. ,Click here.

While living in Boston during the last couple of years, I've witnessed many major developments being built at a breakneck speed. Not surprisingly, the overwhelming majority of these properties are luxury homes that your average citizens can't afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing and the inordinate supply of luxury homes that don't meet the needs of the diverse population of the city.

With the advent of all these new luxury multifamily properties could this put the entire multifamily sector at risk of collapse or flattening? The risk to Class A new construction is obvious if the market flattens but existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances as well as corrections. Let's take a look at the motives for this boom in luxury, and what happens if it ends.

Demand for luxury is on the rise

There are two key drivers behind the demand for luxury apartments. Baby boomers and empty nesters are flocking to city centers like Boston, Austin & Denver with a desire for high-end finishes and amenity-packed structures. This growth can be attributed to the fact that empty nesters and double-income millennial households are opting to rent instead than buy. Perks such as high-end fitness centers, concierge services, and full-service pet spas are now the norm. There is an inordinate quantity of amenities available with every new construction. Developers are rushing to incorporate these modern perks into their projects; however they're not inexpensively.

New Construction is Cost Prohibitive

High-end housing is the primary reason why the majority of developments in the marketplace are of high-end quality. This is due to the rising costs of construction labor. The demand for construction work is at an all-time high and the cost of building materials is at the highest they've ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury structure or in a low-cost structure. It's the same price. It's the identical." To ensure affordable housing cities are enforcing rules that require developers to include affordable units in new construction projects. The typical range is between 10 and 20%, based on the unit count and location. These regulations will not result in an increase in affordable housing.

What are the alternatives to affordable housing? Discover more here.

There have been many cycles of boom and bust within the construction industry over the years. In numerous markets across the country, you'll notice large numbers of apartment buildings built in the 1970's and the 1990's. While they may seem out-of-date compared to the current construction but the "bonesare still in good condition. The buildings built in the frame have been constructed with modern materials and techniques and generally only require surface rehabilitation with the replacement of wear and tear items. These apartment communities, and the secondary markets they're located in are well-positioned to counterbalance the flood of luxury homes being built and provide housing that's reasonably affordable. The Class B homes can perform in any economic climate. If the economy is robust Class C tenants are able to move into Class B properties. If the economy is weak, Class A tenants are forced to relocate to Class B properties. These properties are often offered for less than the price of construction. This allows investors to offer the perfect property to live in and yet still pay attractive rents that tenants of different incomes can afford.
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