CNBC released a report last week that said that the multifamily realty market is in the midst of an "acute crisis". The article concludes that the upper end of the market for luxury is overbuilt and vulnerable to a flattening or market correction. In fact, apartment developers in the 150 largest US cities built 395,775 new housing units last year, which is an increase of 46% Y-o-Y. In these new homes, around 75-80% of them are classified as luxury communities. ,Discover more.

While living in Boston during the last couple of years, I've witnessed several major developments being constructed at an incredibly rapid pace. As a result, the overwhelming majority of these are luxurious luxury residences 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 overabundance of luxury housing that do not meet the needs of the diverse population within the city.

Do these multifamily developments pose a threat to the multifamily industry? The threat to Class A new construction is apparent if the market flattens but existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances and corrections. Let's examine the causes of this luxury boom and what happens if it comes to an end.

The demand for luxury goods is strong

There are two main reasons for the rising demand for luxurious homes. Millennials and empty-nester baby boomers are descending on city centers like Boston, Austin & Denver with a desire for luxurious finishes and amenities-packed properties. This boom is due to the trend that empty nesters and households with double incomes are opting to rent instead to purchase. The latest gyms, concierge services and spas with full-services for pets are all becoming commonplace. Every time a new construction is completed, it seems as though there's an arms race. Developers are aggressively incorporating modern amenities into their projects; however, it doesn't come at a cost.

The cost of construction can be expensive.

The reason the vast majority of the new housing complexes you see coming on the market are luxury is due to the ever-rising costs of construction labor and building materials. Construction labor is highly sought-after and the materials are at their highest price ever. 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 low-cost ones." It costs the same." It's the same." Cities are being forced to adopt rules that require developers to build the right amount of affordable units in their new construction projects. The typical range is between 10 and 20%, based on unit count and location. These regulations will not result in an increase in the number of affordable homes.

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

There have been numerous boom and bust cycles in the building industry throughout the years. In many areas across the country, you will notice large numbers of apartments constructed between the 1970's and 1990's. While they may seem outdated compared to current construction, the "bones” are still good. Built during this period were built using the most modern materials and techniques. They generally just require minor repairs, and wear-related items are able to be replaced. These communities, as well as 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 benefit of these Class B homes is that they generally perform well regardless of the economic conditions. When the economy is strong Class C tenants are able to are able to move into Class B properties . When the economy is struggling 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 offered for less than the price of construction. This lets investors offer the perfect place to call home and yet still pay attractive rents that tenants of different incomes can afford.
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