CNBC issued a report this week that said that the multifamily realty sector is facing 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 150 largest US cities constructed 395,775 brand new housing units in the last year, which represents an increase of 46% Y-o-Y. About 75-80% of these new homes are in luxury communities. ,View source.

While living in Boston during the last couple of years, I've witnessed several major developments being constructed in a rapid manner. Not surprisingly, the overwhelming majority of these are luxurious luxury residences that your average citizens are unable to afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article pointed out the absence of affordable housing as well as an abundance of luxury houses that do not meet the needs of the diverse population within the city.

Are these multifamily developments danger to the multifamily market? If the market is flat it could be a problem of a collapse for Class A new construction. However existing Class B & C multifamily communities are able to withstand market corrections and imbalances. Let's examine the reasons behind why there's been an increase in luxury and what could happen when demand slows.

Luxury demand is strong

There are two major reasons for the rising demand for luxurious apartments. Baby boomers are moving into cities like Boston, Austin, and Denver, with a taste for luxurious finishes and amenities-packed structures. One specific reason to this increase is that a lot of double-income millennial households and empty nesters that can afford to buy are choosing to rent. Luxury gyms, concierge service and spas with full-services for pets are all becoming the norm. Every time a new construction is completed it appears that there's an arms race. Developers are rushing to incorporate these types of modern perks in their developments, however it's not inexpensively.

New construction is expensive

High-end housing is the primary reason for the fact that most developments in the marketplace are of high-end quality. This is because of the growing cost of construction labor. Construction is a high-demand industry and materials are at their highest ever price. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury structures or in affordable ones." It's exactly the same price. It costs the same." To make sure that affordable housing is available cities are now enforcing laws which require developers to build affordable units in their construction plans. The average unit count and the location determines how much they charge. This will not result in an increase in affordable housing.

If Affordable Housing isn't Constructed, What's the alternative? Homepage.

Throughout the decades there has been building boom and bust cycles. In numerous markets across the country, you will 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 "bonesremain in good shape. These buildings were constructed using modern materials and techniques. They generally only require surface rehabilitation and wear and tear items can be replaced. These communities, as well as the secondary markets that they're in are well-positioned to counterbalance the influx of luxury new homes and provide housing that's reasonably affordable. The great thing about these Class B homes is that they generally excel regardless of the economic conditions. When the economy is strong Class C tenants are able to move into Class B properties. When the economy is weak Class A tenants are forced to relocate to Class B properties. Investors can typically buy these homes for less than the cost of building they can provide a great living space, yet keep the rents affordable to tenants of many income levels.
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