CNBC released a report last week that said that the multifamily realty market is experiencing an "acute crisis". The article suggests that the top end of the market for luxury is overbuilt and vulnerable to a flattening or market correction. Developers of apartments in the top 150 US towns built 395 775 new housing units in the last financial year. This represents a 46% increase over previous years. In these new homes, around 75-80% of them are considered to be luxury communities. ,Read this.

I've seen a lot of major developments being built at a rapid pace when I lived in Boston in recent years. Not surprisingly, the overwhelming majority of these are high-end luxury apartments which the average citizen cannot afford. In actuality it was the Spotlight Team at the Boston Globe recently released a set of articles that focused on growth of the "Seaport" neighborhood. The article highlighted its lack of affordable housing, as well as the overabundance of luxury homes that do not meet the needs of the diverse population in the city.

With the emergence of all of these new luxurious multifamily homes could this put the entire multifamily sector at risk of flattening or even a collapse? The danger of Class A new construction is evident if the market is flat but existing Class B & C multifamily communities are uniquely placed to withstand market imbalances and corrections. Let's look at the reasons why there has been such an unprecedented growth in the luxury market and what could happen when demand slows.

The Demand for Luxury is High

There are two main reasons for the rising demand for luxury apartment. Generation Y and baby boomers who are empty-nesters are moving into cities such as Boston, Austin & Denver with a discerning taste for high-end finishes and amenity-packed buildings. One reason for this growth is that a lot of double-income households, as well as empty nesters that can afford to buy are choosing to rent. High-end gyms, concierge services and spas with full-services for pets are becoming more the norm. There's an appalling number of amenities offered with every new construction. Developers are actively incorporating these modern perks into their projects; however, it doesn't come at a cost.

New Construction is costly.

The primary reason for the vast majority of the new homes coming on the market are luxury is due to the ever-rising costs of construction labor and materials. Construction labor demand is at an all-time high and the cost of building materials is the most they have ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious structures or in affordable ones." It's exactly the same price. As a result of high materials and labor costs and the rising value of the natural resources, developers are required to construct luxury homes because the numbers simply don't allow for building any other kind of building. To provide affordable housing, cities are enforcing regulations that require developers to incorporate affordable units in 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 do not guarantee a significant increase in the number of affordable housing.

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

Throughout the decades there have been several building boom and bust cycles. In many markets around the country, you'll find a large number of apartment buildings built in the 1970's and 1990's. While they may seem out-of-date compared to the current construction but the "bones” are still good. Built during this period were built using the most advanced materials and techniques. They generally only require surface rehabilitation and wear items can be replaced. These communities and their secondary markets are well-positioned to counter the influx of luxurious apartments. They also provide affordable housing. The great thing about these Class B homes is that they generally excel regardless of the economic conditions. If the economy is robust Class C tenants are able to are able to move into Class B homes. If the economy is struggling, tenants of Class A have to shift to Class B properties. These properties are often available for less than the price of construction. This permits investors to provide a great property to live in and still maintain attractive rents that tenants with different income levels can afford.
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