This past week, CNBC published an article in which they claimed that "There is an urgent crisis coming our way" within the multifamily real estate industry. The article concludes that the upper end of the luxury market is overbuilt and vulnerable to a flattening or a market correction. In actuality, apartment developers in the largest 150 US cities constructed 395,775 brand new housing units in the last year, which is a 46% increase Y-o-Y. In these new homes, around 75-80% of them are considered luxury communities. ,Discover more here.

While living in Boston in the last few years, I have witnessed numerous major developments being constructed at an incredibly rapid pace. It's not surprising that the vast majority of these properties are luxury homes that your average citizens are unable to afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article highlighted the lack of affordable housing, as well as an abundance of luxury houses that do not meet the needs of the diverse population in the city.

Are these multifamily developments an imminent threat to the multifamily market? If the market is flat it could be a problem for Class A new construction. However, the existing Class B & C multifamily communities can withstand market corrections and imbalances. Let's look at the reasons of this luxury boom and what happens if the boom is over.

Luxury Demand is Strong

There are two major factors driving the demand for luxury apartments. Generation Y and baby boomers who are empty-nesters are moving into cities such as Boston, Austin & Denver with a discerning taste for luxury finishes and luxurious properties. One reason to this increase is that a lot of double-income households, as well as empty nesters with the money to buy are opting to rent. Perks such as high-end gyms, concierge services and fully-service pet spas are becoming standard. It seems like there is an astonishing number of amenities offered with every new construction. Developers are rushing to incorporate these modern perks into their plans, but, it doesn't come inexpensively.

New construction is expensive

The primary reason for the vast majority of the new housing complexes you see being put up for sale is luxury is due to the rising price of construction materials and labor. The demand for construction labor is at an all-time high, as is the cost of building 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 luxurious building or in a budget-friendly building. It's the same cost. It costs the identical." Cities are having to enact regulations to force developers to build a certain number of affordable units in their new construction projects. The typical range is between 10 and 20%, based on the number of units and the location. But these rules alone do not guarantee a significant increase in the number of affordable housing.

If Affordable Housing isn't Constructed, What's the Alternative? Get more info.

There have been numerous cycles of boom and bust in the building industry over the decades. You will find many apartments built between 1970 and 90 in various cities across the nation. Although these properties might seem out-of-date compared to the current construction but the "bones” are still good. Buildings built during this time frame were constructed using modern materials and techniques and typically require only surface renovations with wear items replaced. These apartment communities, and the secondary markets they're in, are positioned well to counterbalance the influx of new luxury apartments and provide housing that's relatively affordable. The best part about Class B properties is that they tend to excel across all economic climates. If the economy is robust Class C tenants can move into Class B properties. If the economy is weak Class A tenants are forced to relocate to Class B homes. Investors are able to purchase these properties at a fraction of the price of construction, which allows them to provide a great place to live yet still maintain rents affordable to tenants with varying income levels.
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