This past week, CNBC published an article which suggested that "There is an acute crisis that is coming our way" within the multifamily real estate market. The article surmises that the top end of the luxury market is over-built and prone to 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 a 46% increase Y-o-Y. Nearly 75-80% of these new homes are in high-end communities. ,Going here.

I've seen many major developments built at breakneck speed during my time in Boston in recent years. A majority of these developments are expensive luxury apartments that most people cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing as well as the excess of luxury housing that don't meet the needs of the diverse population of the city.

Do these multifamily developments pose a threat to the multifamily industry? If the market slows down it could be a problem for Class A new construction. However, existing Class B & C multifamily communities are able to withstand market volatility and market imbalances. Let's examine the reasons behind why there's been an unprecedented growth in the luxury market and what happens if demand subsides.

Luxury demand is strong

There are two major factors driving the increasing demand for luxury homes. Generation Y and baby boomers who are empty-nesters are flocking to city centers such as Boston, Austin & Denver with a discerning taste for luxurious finishes and amenities-packed structures. One of the main reasons for this boom is that a lot of double-income millennial households and empty nesters that can afford to purchase are choosing to rent. Perks such as high-end gyms, concierge services, and fully-service pet spas are becoming the standard. There's an astonishing amount of amenities being offered with every new construction. Modern amenities are being included in developers' projects at a rapid pace, but it isn't cheap.

New construction is expensive.

The main reason that the majority of new developments that are on the market are high-end. This is due to the increasing cost of construction labor. Construction labor demand is at an all-time high, and the cost of materials is at their highest ever been. As 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 low-cost structure. It's the same cost. Because of the high prices for labor and materials as well as the rising value of the natural resources, developers are required to construct luxury homes since the numbers don't work to build any other type of construction. Cities are having to enact regulations to force developers to construct a certain number of affordable units within their construction projects. The number of units and the location will determine the developers will be able to charge. These regulations will not cause an increase in affordable housing.

What alternatives are there for affordable housing? Discover more.

Through the years, there has been building boom and bust cycles. In many markets around the country, you will see a lot of apartments constructed between the 1970's-1990's. Although these properties might seem out-of-date compared to the current construction, the "bonesremain in good shape. Built during this period were constructed using advanced materials and techniques. They typically just require minor repairs, and wear-related items are able to be replaced. These apartment communities, and the secondary markets they're located in, are positioned well to counterbalance the influx of new luxury apartments and maintain housing that is relatively affordable. The Class B homes can thrive in any economic environment. When the economy is thriving Class C tenants can are able to move into Class B properties When the economy is in decline, Class A tenants can find it difficult to justify the extravagant rents and typically move down to more affordable Class B properties. They are typically offered for less than the cost of building. This lets investors offer an ideal property to live in while still offering attractive rents that tenants of different income levels can afford.
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