The week before, CNBC published an article suggesting that "There is an urgent 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 reality, apartment builders in the largest 150 US cities built 395,775 new housing units last year, which is an increase of 46% Y-o-Y. Nearly 75-80% of these new housing units are high-end communities. ,Click this link.

While living in Boston over the past few years, I have witnessed several major developments being constructed at an incredibly rapid pace. A majority of these developments are luxurious luxury residences which the majority of people can't afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing, as well as the overabundance luxury housing which doesn't accommodate the diverse population of the city.

With the emergence of all these new luxurious multifamily homes is this putting the entire multifamily sector at risk of a collapse or flattening? The risk to Class A new construction is evident if the market is flat, however; existing Class B & C multifamily communities are well-positioned to stand up to market imbalances and corrections. Let's take a look at the motives for this luxury boom, and what will happen if it ends.

Luxury demand is strong

There are two main drivers for the rising demand for luxury homes. Baby boomers and empty nesters are flocking to city centers like Boston, Austin & Denver with a keen interest in luxury finishes and luxurious buildings. This boom is due to the trend that empty nesters and families with double incomes in the millennial generation prefer renting rather than purchase. Luxury gyms, concierge service and full-service spas for pets are becoming more the norm. With each new building, it seems as though there's an arms race. These kinds of modern amenities are being incorporated into the projects of developers rapidly however, it's not cheap.

New Construction is costly.

The primary reason for the vast majority of the new housing complexes you see coming on the market are expensive is because of the ever-rising costs of construction materials and labor. The demand for construction labor is at an all-time high, and the cost of building materials is at their highest ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury building or in a low-cost construction. It costs the same." As a result of high materials and labor costs and the rising value of the natural resources developers are being required to construct luxury homes due to the fact that the numbers do not make sense to construct anything else. Cities are forced to pass rules that require developers to create the right amount of affordable homes within their new construction projects. The average unit count and the location will determine how the developers will be able to charge. But these rules alone will not provide a meaningful growth in affordable housing.

What alternatives are there for affordable housing? View source.

Throughout the decades there has been building boom and bust cycles. There are many apartments built between 1970 and 90 in various markets across the nation. Although these properties might seem outdated compared to current construction, the "bonesremain in good shape. Buildings built during this time frame have been constructed with modern materials and techniques and typically require only surface renovations and wear-related items replaced. These communities as well as the secondary markets they serve are well placed to offset the flood of luxurious homes. They also provide affordable housing. The Class B homes are able to thrive in any economic environment. When the economy is strong Class C tenants can shift to Class B properties. When the economy is struggling, tenants of Class A are forced to move down to more affordable Class B homes. These homes are usually offered for less than the cost of building. This permits investors to provide the perfect property to live in while still offering appealing rents that tenants of different income levels are able to afford.
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