CNBC published a report this week that said that the multifamily realty sector is in the midst of an "acute crisis". According to the article the market's luxury end is overcrowded and susceptible to market declines or flattening. Developers of apartments in the largest 150 US towns delivered 395 775 housing units in the last fiscal year. This is an increase of 46% compared to previous years. Of the new homes, around 75-80% are considered to be luxury communities. ,Read more here.

I've seen a lot of major developments built at breakneck speed during my time in Boston for the past few years. Not surprisingly, the overwhelming majority of these homes are luxury homes that the average person can't afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. The article highlighted the lack of affordable housing and an abundance of luxury houses which does not serve the diverse population within the city.

With the advent of all these luxury multifamily properties, does this put the entire multifamily sector at risk of collapse or flattening? The risk of Class A new construction is apparent if the market flattens but the existing Class B & C multifamily communities are uniquely positioned to stand up to market imbalances and corrections. Let's look at the reasons for this luxury boom, and what happens if the boom ends.

The demand for luxury goods is high.

There are a few key drivers behind the rising demand for luxury apartments. Millennials and empty nester baby boomers are moving into cities like Boston and Austin as well as Denver, with a taste for luxury finishes and amenities-packed structures. The rise in popularity can be attributed to the fact that empty nesters and double-income millennial households prefer renting rather than purchase. Perks such as high-end fitness centers, concierge services, and fully-service pet spas are becoming the standard. With every new development, it seems as though there's an arms race. Developers are rushing to incorporate these types of modern perks into their plans, but it's not at a cost.

New Construction is costly.

The main reason why the vast majority of the new residential developments that are on the market is luxurious is because of the increasing cost of construction labor and materials. Construction is a high-demand industry and materials are at their most expensive ever. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or low-cost ones." It's exactly the same price. It costs the same." To make sure that affordable housing is available, cities are enforcing regulations that require developers to include affordable units in construction plans. The typical range is between 10 and 20%, based on unit count and location. But these rules alone will not provide a meaningful increase in the amount of affordable housing.

If Affordable Housing Can't Be Constructed, What's the alternative? Discover more.

Over the past few decades, there has been building booms and busts. In many markets around the country, you will notice large numbers of apartment buildings built in the 1970's and the 1990's. While these homes may appear outdated compared to current construction however, the "bonesare still in good condition. The buildings built in the frame were constructed using modern materials and techniques and generally only require surface rehabilitation with wear items replaced. These communities, as well as the secondary markets they're located in are well-positioned to counterbalance the influx of luxury new homes and maintain housing that is reasonably affordable. The Class B homes are able to thrive in any economic environment. When the economy is thriving, Class C tenants shift to Class B properties When the economy is in decline, Class A tenants can find it difficult to justify the extravagant rents, and they typically shift to class B properties. Investors are able to purchase these properties for a fraction of the price of construction and can thus provide a great living space, yet maintain rents at a level attractive to tenants with varying income levels.
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