CNBC released a report last week that said that the multifamily realty market is facing an "acute crisis". The article surmises that the upper end of the market for luxury is overbuilt and susceptible to a flattening or a market correction. In fact, apartment developers in the 150 largest US cities constructed 395,775 brand new housing units last year, which is an increase of 46% Y-o-Y. The majority of the new housing units are high-end communities. ,Visit here.

When I lived in Boston in the last few years, I have witnessed numerous major developments being constructed at an incredibly rapid pace. Not surprisingly, the overwhelming majority of these are luxury homes which the average citizen cannot afford. In actuality, the Spotlight Team at the Boston Globe recently released a set of articles that focused on the development of the new "Seaport" neighborhood. The article highlighted its lack of affordable housing and the overabundance of luxury homes that does not cater to the diverse population within the city.

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

Demand for luxury is on the rise

There are two main reasons of the growing demand for luxury homes. Generation Y and empty nester baby boomers are making their way to cities like Boston Austin, Boston, and Denver with a discerning palate for luxury finishes and amenities-packed properties. This growth can be attributed to the fact that empty nesters and families with double incomes in the millennial generation prefer renting rather than purchase. Perks such as high-end gyms, concierge services and pet spas that are full-service are becoming standard. With each new building, it seems as though there's an arms race. Developers are actively incorporating these types of modern perks in their developments, however it's not cheap.

New construction is expensive

Luxury housing is the main reason why the majority of new developments that are in the marketplace are of high-end quality. This is because of the growing cost of construction labor. Construction labor demand is at an all-time high, and the cost of materials is at the highest they've ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury building or in a budget-friendly construction. It's priced the same." Due to the high cost of materials and labor costs and the rising value of the raw land, developers are required to construct luxury homes due to the fact that the numbers do not allow for building any other kind of building. To make sure that affordable housing is available, cities are enforcing regulations which require developers to build affordable units in new construction projects. The typical range is between 10 and 20%, based on the number of units and the location. But these rules alone won't result in a significant growth in affordable housing.

If Affordable Housing isn't Built, What is the alternative? Go here.

There have been numerous boom and bust cycles within the construction industry over the years. You will find many apartments built between 1970 and 1990 in various cities across the United States. While these homes may appear old-fashioned compared to modern construction however, the "bonesare still in good condition. These buildings constructed in the frame have been constructed with modern materials and techniques and typically only need surface rehabbing with the replacement of wear and tear items. These communities, as well as the secondary markets they're in are well-positioned to take on the flood of new luxury apartments and to maintain housing that's relatively affordable. The Class B homes can succeed in any economic situation. If the economy is flourishing Class C tenants are able to shift to Class B properties When the economy is struggling, Class A tenants can no longer justify the luxury rents and are typically forced to move to more affordable Class B properties. These properties are often available for less than the price of construction. This allows investors to offer the perfect property to live in and yet still pay appealing rents that tenants of different income levels are able to afford.
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