CNBC published a report this week that stated that the multifamily real estate sector is in the midst of an "acute crisis". The article surmises that the upper end of the luxury market is overbuilt and vulnerable to flattening or a market correction. In reality, apartment builders in the largest 150 US cities built 395,775 new housing units in the last year, which is a 46% increase Y-o-Y. Of the new housing units, nearly 75-80% of them are classified as luxury communities. ,Discover more.

I've seen a lot of major development projects being constructed at an incredible pace during my time in Boston for the past few years. Most of these homes are luxury homes that most people cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. The article highlighted its lack of affordable housing as well as an overabundance of luxury housing that do not meet the needs of the diverse population of the city.

Do these multifamily developments pose an imminent threat to the multifamily market? If the market is flat, there is a risk for Class A new construction. However, the existing Class B & C multifamily communities can stand up to market volatility and market imbalances. Let's look at the reasons for this boom in luxury, and what happens if the boom comes to an end.

Demand for luxury is on the rise

There are two major reasons to the increasing demand for luxury apartments. Generation Y and empty nester baby boomers are making their way to cities such as Boston, Austin, and Denver. They have a keen taste for luxury finishes and amenities-packed structures. The rise in popularity is due to the trend that empty nesters and households with double incomes prefer renting rather to purchase. Perks such as high-end gyms, concierge services, and fully-service pet spas are now the norm. It seems like there is an appalling amount of amenities being offered with each new building. Modern amenities are being incorporated into the projects of developers rapidly however, it's not cheap.

The cost of construction can be expensive.

The main reason why the majority of new residential developments being put up for sale is expensive is because of the increasing cost of construction materials and labor. Construction labor demand is at an all-time high, as is the price of building materials is at their highest ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious buildings or low-cost ones." It's exactly the same price. It costs the identical." To provide affordable housing, cities are enforcing regulations which require developers to build affordable units in their new construction projects. Most often, between 10% and 20% based on unit count and location. These regulations will not cause an increase in housing for the poor.

What alternatives are there to housing that is affordable? Visit this link.

There have been many cycles of boom and bust within the construction industry over the years. In many markets around the country, you'll find a large number of homes built between the 1970's-1990's. Although these properties might seem old-fashioned compared to modern construction however, the "bonesare still in good condition. The buildings built in the frame were built with modern materials and techniques and generally only require surface rehabilitation and wear-related items replaced. These apartment communities, and the secondary markets that they're in, are positioned well to counterbalance the influx of luxury new homes and provide housing that's relatively affordable. The Class B homes can thrive in any economic environment. When the economy is strong, Class C tenants move up into Class B properties . When the economy is struggling, Class A tenants can find it difficult to justify the extravagant rents, and they typically shift to Class B properties. They are typically offered for less than the cost of building. This permits investors to provide a great property to live in while still offering attractive rents that tenants with different income levels are able to afford.
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