CNBC published a report this week that stated that the multifamily real estate sector is experiencing an "acute crisis". According to the article the upper-end of the luxury market is overcrowded and susceptible to market fluctuations or flattening. Apartment developers in the top 150 US towns delivered 395 775 new housing units in the last financial year. This represents an increase of 46% over previous years. Nearly 75-80% of these new housing units are luxurious communities. ,Click here.

I've seen a lot of major development projects being constructed at an incredible pace while living in Boston over the last few years. It's not surprising that the vast majority of these are high-end luxury apartments that the average person can't afford. In reality, the Spotlight Team at the Boston Globe recently published a series of articles that focused on creation of the "Seaport" neighborhood. The article highlighted the lack of affordable housing and the overabundance of luxury homes that does not cater to the diverse population of the city.

With the advent of all these luxury multifamily properties, does this put the entire multifamily market at risk of a flattening or even a collapse? If the market is flat, there is a risk of a collapse for Class A new construction. However existing Class B & C multifamily communities can withstand market fluctuations and imbalances. Let's take a look at the motives of this luxury boom and what will happen if it is over.

Demand for luxury is on the rise

There are a couple of key drivers behind the rising demand for luxury apartments. Baby boomers and empty nesters are moving into cities such as Boston, Austin & Denver with a desire for high-end finishes and amenity-packed buildings. This growth can be attributed to the reality that empty-nesters and double-income millennial households are choosing to rent rather to purchase. Facilities like top-of-the-line fitness centers, concierge services and pet spas that are full-service are now the norm. Every time a new construction is completed, it seems as though there's an arms race. These kinds of modern facilities are being integrated into the projects of developers at a rapid pace however, it's not cheap.

New construction is expensive

High-end housing is the primary reason why the majority of new developments that are on the market are high-end. This is because of the increasing costs of construction labor. The demand for construction labor is at an all-time high, as is the cost of building materials is at their highest ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxurious building or in a budget-friendly structure. It's priced the same." It costs the same." To make sure that affordable housing is available, cities are enforcing regulations that require developers to incorporate affordable units in new construction projects. The typical range is between 10 and 20%, based on unit count and location. The regulations won't lead to an increase in affordable housing.

If Affordable Housing Isn't Constructed, What's the Alternative? Read more.

There have been numerous cycles of boom and bust in the construction industry over the years. In numerous markets across the country, you'll notice large numbers of apartments constructed between the 1970's and the 1990's. While these homes may appear outdated compared to current construction, the "bones” are still good. The buildings built during this time were constructed using modern techniques and materials. They typically just require minor repairs, and wear-related items are able to be repaired. These communities, as well as the secondary markets they're located in are well-positioned to take on the flood of new luxury apartments and to maintain housing that's fairly affordable. The great thing about these Class B properties is that they typically perform well regardless of the economic conditions. When the economy is strong Class C tenants are able to are able to move into Class B homes. When the economy is weak tenants of Class A are forced to move down to more affordable Class B properties. Investors are able to buy these homes for a fraction of the cost of building, which allows them to provide a great home, but ensure that rents remain in a range that is appealing to tenants of many income levels.
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