This past week, CNBC published an article suggesting that "There is an urgent crisis that is coming towards us" within the multifamily real estate sector. The article suggests that the upper tier of the luxury market is overbuilt and vulnerable to a flattening or a market correction. In fact, apartment developers in the 150 largest US cities delivered 395,775 new housing units last year, which marks a 46% increase Y-o-Y. Of the new units of housing, about 75-80% of them are classified as luxury communities. ,Learn more.

I've seen a lot of major developments built at breakneck speed during my time in Boston over the last few years. It's not surprising that the vast majority of these homes are luxury homes which the average citizen are unable to 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 abundance of luxury houses which does not serve the diverse population in the city.

Are these multifamily developments danger to the multifamily industry? If the market is flat, there is a risk for Class A new construction. However, the existing Class B & C multifamily communities can withstand market corrections and imbalances. Let's take a look at the motives for this boom in luxury, and what happens if it ends.

Luxury Demand is Strong

There are two important factors that drive the increasing demand for luxury homes. Generation Y and baby boomers who are empty-nesters are flocking to city centers like Boston, Austin & Denver with a desire for high-end finishes and amenity-packed structures. This growth is due to the trend that empty nesters and double-income millennial households prefer renting rather than purchase. High-end gyms, concierge services and full-service spas for pet owners are becoming more regular. With every new development there is a sense that there is an amenities arms race. Developers are actively incorporating these types of modern perks into their projects; however it's not cheap.

New construction is expensive.

The reason the majority of new homes being put up for sale is expensive is because of the rising cost of construction labor and building materials. Construction labor is highly sought-after and materials are at their highest price ever. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious buildings or affordable buildings." It's exactly the same price. Due to the high cost of cost of labor and materials, and the rising value of the natural resources developers are obliged to build luxurious products because the numbers simply don't allow for building anything else. Cities are being forced to adopt rules that require developers to construct a certain number of affordable homes within their construction projects. The number of units and the location will determine how much they charge. These regulations will not lead to an increase in affordable housing.

What are the alternatives to housing that is affordable? Discover more here.

There have been numerous boom and bust cycles in the construction industry over the years. In numerous markets across the country, you will see a lot of homes built between the 1970's-1990's. Although these homes may appear very out of date compared to what's being built in the present but they're "bones" are quite good. The buildings built in the frame were built with modern techniques and materials. They typically only need surface rehabbing and wear-related items replaced. These communities, as well as the secondary markets they serve are well placed to counter the influx of luxury homes. They also offer affordable housing. The Class B homes can succeed in any economic situation. When the economy is strong, Class C tenants are able to move into Class B homes. When the economy is struggling Class A tenants are forced to relocate to Class B properties. They are typically offered for less than the price of construction. This permits investors to provide the perfect property to live in and still maintain appealing rents that tenants of different income levels are able to afford.
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