In the last week, CNBC published an article suggesting that "There is an acute crisis that is coming our way" within the multifamily real estate sector. According to the article the luxury market's upper end is too crowded and vulnerable to market corrections or flattening. In fact, apartment developers in the 150 largest US cities delivered 395,775 new housing units in the last year, which marks an increase of 46% year-over-year. In these new housing units, nearly 75-80% are considered to be luxury communities. ,Going here.

I've witnessed many large developments being built at a rapid pace during my time in Boston in recent years. Not surprisingly, the overwhelming majority of these properties are high-end luxury apartments that the average person 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 overabundance of luxury housing which does not serve the diverse population of the city.

Do these multifamily developments pose an imminent threat to the multifamily sector? The danger to Class A new construction is evident if the market is flat but the the existing Class B & C multifamily communities are uniquely placed to withstand market imbalances as well as corrections. Let's examine why there has been such a luxury boom and what could happen in the event that demand declines.

Luxury Demand is Strong

There are two major reasons of the growing demand for luxurious homes. Millennials and empty nester baby boomers are moving to cities such as Boston Austin, Boston, and Denver with a discerning palate for luxurious finishes and amenities-packed buildings. This growth is due to the fact that empty nesters and households with double incomes prefer renting rather than purchase. Facilities like top-of-the-line fitness centers, concierge services and full-service pet spas are becoming the standard. There's an appalling quantity of amenities available with every new construction. Modern facilities are being integrated into development projects at a rapid pace and aren't cheap.

New construction is expensive.

The main reason why the majority of new developments that are on the market are expensive. This is due to the increasing cost of construction labor. Construction labor is in high demand and materials are at their highest price ever. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxurious building or in a budget-friendly building. It's the same cost. Due to the high cost of materials and labor costs and the appreciation of the raw land developers are forced to build luxury products due to the fact that the numbers do not work to build any other type of construction. Cities are forced to pass laws that force developers to construct an amount of affordable units within their new construction projects. Typically between 10%-20% depending on the number of units and the location. But, on their own, these rules do not guarantee a significant increase in the number of affordable housing.

If Affordable Housing Isn't Constructed, What's the alternative? Read this.

There have been many cycles of boom and bust in the construction industry over the decades. There are many apartment buildings built between 1970 and 90 in various areas across the United States. Although these homes may appear very out of date compared to what's being built in the present but the "bones" are in good shape. These buildings constructed in the frame were built with contemporary materials and techniques, and generally only require surface rehabilitation with wear items replaced. These apartment communities, and the secondary markets they're in are well-positioned to counterbalance the flood of new luxury apartments and to maintain housing that's fairly affordable. The great thing about these Class B homes is that they generally perform well regardless of the economic conditions. When the economy is strong, Class C tenants move into Class B properties. When the economy is in decline tenants of Class A are forced to relocate to Class B properties. Investors are able to purchase these properties for a fraction of the cost to build they can offer a wonderful living space, yet ensure that rents remain at a level attractive to tenants of many income ranges.
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