The week before, CNBC published an article suggesting that "There is an urgent crisis headed our way" within the multifamily real estate industry. The article suggests that the top end of the market for luxury is overbuilt and susceptible to a flattening or a market correction. In reality, apartment builders in the 150 largest US cities constructed 395,775 brand new housing units last year, which is an increase of 46% year-over-year. Of the new housing units, nearly 75-80% are considered to be luxury communities. ,Go here.

When I lived in Boston over the past few years, I have witnessed many major developments being built at a breakneck speed. Not surprisingly, the overwhelming majority of these are high-end luxury apartments which the average citizen are unable to afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article highlighted the lack of affordable housing and an abundance of luxury houses that do not meet the needs of the diverse population within the city.

With the emergence of all of these new multi-family luxury properties could this put the entire multifamily market at risk of collapse or flattening? If the market slows down, there is a risk of a collapse for Class A new construction. However, the existing Class B & C multifamily communities can withstand market volatility and market imbalances. Let's go through the reasons for such an unprecedented growth in the luxury market and what happens if demand subsides.

Luxury Demand is Strong

There are two key drivers behind the rising demand for luxury apartments. Generation Y and empty nester baby boomers are making their way to cities such as Boston and Austin as well as Denver with a discerning palate for high-end finishes and luxurious properties. One reason for this boom is that a lot of double-income households, as well as empty nesters that can afford to buy are opting to rent. Perks such as high-end fitness centers, concierge services and fully-service pet spas are becoming standard. There is an inordinate quantity of amenities available with every new construction. Modern amenities are being included in developers' projects rapidly and aren't cheap.

Construction costs are high for new construction.

Luxury housing is the main reason for the fact that most developments on the market are high-end. This is due to the increasing cost of construction labor. The demand for construction labor is at an all-time high and 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 care if it's in luxury structures or in affordable ones." It costs the same." As a result of high prices for labor and materials as well as the appreciation of the natural resources developers are required to construct luxury homes due to the fact that the numbers do not make sense to construct anything else. Cities are having to enact regulations to force developers to build an amount of affordable units in their new construction projects. Most often, between 10% and 20% based on the unit count and the location. The regulations won't result in an increase in housing for the poor.

If Affordable Housing isn't Built, What is the Alternative? Learn more here.

There have been numerous cycles of boom and bust in the building industry over the decades. There are many apartments constructed between 1970 and 1990 in various areas across the United States. Although these properties might seem old-fashioned compared to modern construction but the "bones” are still good. Built during this period were constructed with modern techniques and materials. They generally only require surface rehabilitation and wear items can be replaced. These communities, as well as their secondary markets are well-positioned to offset the flood of luxurious apartment buildings. They also offer affordable housing. The best part about Class B properties is that they generally are able to perform well in all economic climates. If the economy is robust Class C tenants can shift to Class B properties. If the economy is struggling, tenants of Class A are forced to move down to Class B homes. These properties are often accessible for less than price of construction. This allows investors to offer an ideal property to live in and still maintain appealing rents that tenants of different income levels can afford.
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