CNBC published a report this week that stated that the multifamily realty market is in the midst of an "acute crisis". According to the article the upper-end of the luxury market is too crowded and vulnerable to market corrections or flattening. In actuality, apartment developers in the largest 150 US cities built 395,775 new housing units in the last year, which marks a 46% increase Y-o-Y. Nearly 75-80% of these new homes are in luxury communities. ,Read more here.

I've witnessed many large development projects being constructed at an incredible pace during my time in Boston for the past few years. It's not surprising that the vast majority of these homes are luxury homes that your average citizens cannot afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing and the excess of luxury housing which doesn't accommodate the diverse population of the city.

With the emergence of all these new multi-family luxury properties, does this put the entire multifamily market at risk of a flattening or 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 can stand up to market volatility and market imbalances. Let's look at the reasons for this boom in luxury, and what happens if the boom is over.

The demand for luxury goods is strong

There are two major reasons for the rising demand for luxurious apartment. Baby boomers are making their way to cities such as Boston Austin, Boston, and Denver. They have a keen taste for luxury finishes and amenities-packed buildings. One of the main reasons to this increase is that lots of double-income households, as well as empty nesters that can afford to purchase are choosing to rent. High-end gyms, concierge services and full-service spas for pet owners are all becoming commonplace. There's an astonishing quantity of amenities available with every new construction. These kinds of modern facilities are being integrated into development projects at a rapid pace and aren't cheap.

New construction is expensive

Luxury housing is the main reason for the fact that most developments on the market are high-end. This is because of the rising costs of construction labor. Construction is a high-demand industry and materials are at their highest price ever. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury structure or in an affordable structure. It's the same cost. As a result of high cost of labor and materials, and the rise in the value of raw land developers are obliged to build luxurious products due to the fact that the numbers do not make sense to construct any other kind of building. To make sure that affordable housing is available cities are now enforcing laws that require developers to include affordable units in their construction plans. The average unit count and the location will determine much they charge. This will not lead to an increase in housing for the poor.

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

There have been numerous boom and bust cycles within the building industry over the years. In many areas across the country, you'll see a lot of apartments constructed between the 1970's and 1990's. Although these homes may appear very out of date in comparison to the modern buildings being constructed today but the "bones" are good. Buildings built during this time frame have been constructed with contemporary materials and techniques, and typically require only surface renovations with the replacement of wear and tear items. These communities, as well as the secondary markets that they're in, are positioned well to counterbalance the influx of new luxury apartments and to maintain housing that's relatively affordable. The benefit of these Class B properties is that they generally excel across all economic climates. When the economy is strong Class C tenants are able to shift to Class B properties When the economy is struggling, Class A tenants can find it difficult to justify the extravagant rents and are typically forced to move to class B properties. Investors can usually purchase these properties at only a small portion of the cost of building, which allows them to offer a wonderful living space, yet ensure that rents remain at a level attractive to tenants of many income levels.
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