The week before, CNBC published an article in which they claimed that "There is a crisis of extreme proportions that is coming towards us" in the multifamily real estate sector. According to the article, the market's luxury end is overcrowded and susceptible to market declines or flattening. In actuality, apartment developers in the top 150 US cities delivered 395,775 new housing units last year, which marks an increase of 46% year-over-year. Nearly 75-80% of these new homes are in luxurious communities. ,Click here.

I've seen many major development projects being constructed at an incredible pace while living in Boston over the last few years. A majority of these developments are luxurious luxury residences that the majority of people are unable to afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article highlighted the lack of affordable housing, as well as the overabundance of luxury homes that does not cater to the diverse population within the city.

With the emergence of all these luxurious multifamily homes, does this put the entire multifamily sector at risk of flattening or even a collapse? If the market flattens it could be a problem for Class A new construction. However, the existing Class B & C multifamily communities can stand up to market volatility and market imbalances. Let's look at the reasons why there has been such a luxury boom and what will happen when demand slows.

The demand for luxury goods is high.

There are two main drivers of the growing demand for luxury apartment. Baby boomers and empty nesters are moving into cities such as Boston, Austin & Denver with a keen interest in luxurious finishes and amenities-packed structures. One reason for this growth is that a lot of double-income households of millennials and empty nesters who can afford to buy are opting to rent. Benefits like high-end gyms, concierge services, and full-service pet spas are now the norm. There is an inordinate number of amenities offered with every new construction. Developers are aggressively incorporating these modern perks into their plans, but, it doesn't come at a cost.

New Construction is Cost Prohibitive

Luxury housing is the main reason that the majority of new developments that are on the market are high-end. This is due to the growing costs of construction labor. The demand for construction work is at an all-time high, as is the cost of materials is the most they have ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxury structure or in a budget-friendly structure. It's the same price. Because of the high prices for labor and materials as well as the rise in the value of natural resources developers are required to construct luxury homes due to the fact that the numbers do not make sense to construct any other kind of building. Cities are forced to pass laws that force developers to create a certain number of affordable units within their construction projects. Typically between 10%-20% depending on unit count and location. But these rules alone do not guarantee a significant increase in the number of affordable housing.

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

There have been numerous cycles of boom and bust in the construction industry over the decades. You will find many apartments constructed between 1970 and 1990 in various cities across the country. While these properties may feel outdated compared to what's being built today, the "bones" are quite good. These buildings constructed in the frame have been constructed with contemporary materials and techniques, and typically only need surface rehabbing and wear-related items replaced. These communities, as well as the secondary markets they serve are well placed to counteract the overflow of luxurious homes. They also provide affordable housing. These Class B properties are able to succeed in any economic situation. When the economy is strong, Class C tenants move into Class B properties. When the economy is struggling Class A tenants are forced to relocate to more affordable Class B properties. These homes are usually accessible for less than cost of building. This permits investors to provide an ideal place to call home while still offering attractive rents that tenants of different income levels can afford.
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