The week before, CNBC published an article suggesting that "There is an acute crisis coming our way" in the multifamily real estate market. According to the article the upper-end of the luxury market is overcrowded and susceptible to market corrections or flattening. In fact, apartment developers in the largest 150 US cities constructed 395,775 brand new housing units last year, which is a 46% increase Y-o-Y. Of these new housing units, nearly 75-80% are classified as luxury communities. ,Read more.

I've seen a lot of major developments built at breakneck speed during my time in Boston for the past few years. A majority of these developments are luxury homes which the majority of people can't afford. In actuality it was the Spotlight Team at the Boston Globe recently published a series of pieces that focused on the creation of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing and the inordinate supply of luxury homes that don't meet the needs of its diverse population.

Do these multifamily developments pose a threat to the multifamily industry? The threat of Class A new construction is apparent if the market flattens but the the existing Class B & C multifamily communities are well-positioned to stand up to market imbalances and corrections. Let's examine the reasons for such an increase in luxury and what will happen if demand subsides.

The Demand for Luxury is High

There are two main reasons of the growing demand for luxury homes. Generation Y and empty nester baby boomers are moving into cities like Boston and Austin as well as Denver. They have a keen taste for high-end finishes and luxurious properties. This growth is due to the fact that empty nesters and families with double incomes in the millennial generation prefer renting rather than purchase. Benefits like high-end gyms, concierge services and pet spas that are full-service are becoming standard. There is an astonishing number of amenities offered with every new construction. Modern facilities are being integrated into development projects rapidly and aren't cheap.

New Construction is costly.

Luxury housing is the main reason why the majority of new developments you see in the marketplace are of high-end quality. This is because of the growing costs of construction labor. The demand for construction labor is at an all-time high, and the cost of materials is at their highest 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 an affordable structure. It's priced the same." It's the same." Cities are having to enact regulations to force developers to construct a certain number of affordable units in their construction projects. The average unit count and the location determines how much they charge. However, these regulations alone do not guarantee a significant increase in the number of affordable housing.

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There have been many cycles of boom and bust in the building industry throughout the years. In many markets around the country, you'll notice large numbers of apartment buildings built in the 1970's and the 1990's. While these homes may appear outdated compared to current construction, the "bonesare still in good condition. Buildings built during this time frame were constructed using contemporary materials and techniques, and typically only need surface rehabbing with wear items replaced. These communities, as well as their secondary markets are well-positioned to counter the influx of luxury apartment buildings. They also offer affordable housing. The benefit of these Class B homes is that they tend to excel regardless of the economic conditions. When the economy is thriving Class C tenants can are able to move into Class B homes. If the economy is in decline, Class A tenants can find it difficult to justify the extravagant rents, and they typically shift to class B properties. Investors are able to purchase these properties for only a small portion of the cost of building, which allows them to offer a wonderful living space, yet maintain rents at a level attractive to tenants of many income ranges.
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