CNBC issued a report this week that stated that the multifamily realty market is experiencing an "acute crisis". The article concludes that the upper tier of the luxury market is overbuilt and susceptible to flattening or a market correction. Developers of apartments in the top 150 US towns built 395 775 new housing units during the financial year. This is a 46% increase over previous years. Of the new units of housing, about 75-80% of them are classified as luxury communities. ,Find out more.

When I lived in Boston in the last few years, I have witnessed numerous major developments being constructed in a rapid manner. Most of these homes are luxurious luxury residences that most people cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article pointed out the absence of affordable housing and an abundance of luxury houses which does not serve the diverse population in the city.

With the advent of all these luxurious multifamily homes, does this put the entire multifamily sector at risk of flattening or even a collapse? The risk of Class A new construction is apparent if the market flattens but existing Class B & C multifamily communities are uniquely placed to stand up to market imbalances and corrections. Let's go through the reasons behind why there's been an increase in luxury and what will happen when demand slows.

The Demand for Luxury is High

There are two main reasons to the increasing demand for luxurious homes. Generation Y and baby boomers who are empty-nesters are flocking to city centers like Boston, Austin & Denver with a keen interest in luxurious finishes and amenities-packed structures. One reason for this growth is that lots of double-income households of millennials and empty nesters with the money to purchase are choosing to rent. Benefits like high-end fitness centers, concierge services, and pet spas that are full-service are now the norm. With every new development, it seems as though there's an arms race. These kinds of modern amenities are being incorporated into development projects at a rapid pace however, it's not cheap.

New construction is expensive

The main reason why the majority of new homes being put up for sale is luxurious is because of the rising price of construction labor and building materials. Construction labor is highly sought-after and materials are priced at their highest price ever. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury structure or in a low-cost construction. It's the same cost. It's the identical." Cities are being forced to adopt rules that require developers to construct the right amount of affordable homes within their construction projects. Most often, between 10% and 20% based on the unit count and the location. But, on their own, these rules do not guarantee a significant increase in the amount of affordable housing.

If Affordable Housing Can't Be Built, What is the Alternative? Click here.

There have been numerous boom and bust cycles in the construction industry over the years. In many markets around the country, you'll find a large number of apartments constructed between the 1970's and the 1990's. Although these properties might seem outdated compared to current construction, the "bonesremain in good shape. These buildings constructed in the frame were built with modern techniques and materials. They generally only require surface rehabilitation and wear-related items replaced. These apartment communities, and the secondary markets they're in are strategically placed to take on the flood of luxury homes being built and to maintain housing that's fairly affordable. The Class B homes can thrive in any economic environment. When the economy is thriving Class C tenants can move up into Class B properties When the economy is in decline the Class A tenants will find it difficult to justify the extravagant rents and are typically forced to move to more affordable class B properties. These homes are usually offered for less than the cost of building. This permits investors to provide a great location to live in and still maintain attractive rents that tenants of different income levels can afford.
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