This past week, CNBC published an article in which they claimed that "There is an urgent crisis headed our way" in the multifamily real estate industry. According to the report the market's luxury end is overcrowded and susceptible to market fluctuations or flattening. In reality, apartment builders in the largest 150 US cities built 395,775 new housing units in the last year, which is an increase of 46% Y-o-Y. About 75-80% of these new housing units are luxury communities. ,Get more info.

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 luxury homes that the average person are unable to afford. In reality it was the Spotlight Team at the Boston Globe recently released a set of articles that focused on the growth of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing and the overabundance luxury housing that don't meet the needs of the diverse population of the city.

With the advent of all these new multi-family luxury properties could this put the entire multifamily industry at risk of a flattening or even a collapse? If the market is flat and the risk of collapse increases, it is of a collapse for Class A new construction. However the existing Class B & C multifamily communities are able to withstand market volatility and market imbalances. Let's look at the reasons for this luxury boom, and what happens if the boom comes to an end.

The Demand for Luxury is High

There are two major reasons for the rising demand for luxury homes. Generation Y and empty nester baby boomers are making their way to cities like Boston, Austin, and Denver with a discerning palate for luxury finishes and amenities-packed structures. One specific reason for this growth is that lots of double-income millennial households and empty nesters with the money to buy are choosing to rent. High-end gyms, concierge services and full-service spas for pet owners are all becoming commonplace. There's an inordinate amount of amenities being offered in every new building. These types of modern facilities are being integrated into developers' projects rapidly and aren't cheap.

New Construction is Cost Prohibitive

The main reason why the majority of developments in the marketplace are of high-end quality. This is because of the rising costs of construction labor. Construction labor is highly sought-after and materials are at their highest ever price. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury structure or in a budget-friendly building. It's the same cost. Due to the high cost of prices for labor and materials as well as the rise in the value of natural resources, developers are forced to build luxury products since the numbers don't allow for building any other type of construction. Cities are forced to pass regulations to force developers to create a certain number of affordable homes within their new construction projects. The number of units and the location will determine the developers will be able to charge. These regulations will not lead to an increase in the number of affordable homes.

If Affordable Housing Can't Be Built, what is the alternative? Read more.

There have been numerous cycles of boom and bust within the building industry throughout the decades. In many areas across the country, you will see a lot of apartments constructed between the 1970's and 1990's. Although these properties might seem out-of-date compared to the current construction however, the "bonesare still in good condition. The buildings built during this time were built using the most advanced materials and techniques. They generally only require surface rehabilitation and wear-related items are able to be replaced. These communities, as well as the secondary markets they're in are well-positioned to counterbalance the influx of luxury homes being built and to maintain housing that's fairly affordable. The Class B homes can succeed in any economic situation. When the economy is strong Class C tenants are able to are able to move into Class B properties When the economy is struggling, Class A tenants can find it difficult to justify the extravagant rents and typically move down to class B properties. Investors are able to purchase these properties for a fraction of the cost to build, which allows them to provide a great living space, yet keep the rents at a level attractive for tenants with different income levels.
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