The week before, CNBC published an article in which they claimed that "There is an acute crisis that is coming towards us" in the multifamily real estate sector. According to the article the market's luxury end is crowded and prone to market corrections or flattening. In actuality, apartment developers in the largest 150 US cities built 395,775 new housing units last year, which is an increase of 46% Y-o-Y. About 75-80% of these new units of housing are luxury communities. ,Learn more.

While living in Boston during the last couple of years, I have witnessed many major developments being built at an incredibly rapid pace. A majority of these developments are luxury homes that most people cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing and the overabundance luxury housing that don't meet the needs of the diverse population of the city.

With the advent of all these luxurious multifamily homes, does this put the entire multifamily sector at risk of flattening or collapse? The danger of Class A new construction is evident if the market is flat but the the existing Class B & C multifamily communities are uniquely positioned to stand up to market imbalances and corrections. Let's examine the reasons behind why there's been a luxury boom and what happens when demand slows.

The Demand for Luxury is High

There are two major reasons of the growing demand for luxurious apartment. 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 boom can be attributed to the trend that empty nesters and families with double incomes in the millennial generation are choosing to rent rather than purchase. Luxury gyms, concierge service and full-service spas for pet owners are all becoming the norm. It seems like there is an astonishing number of amenities offered with each new building. Developers are rushing to incorporate these modern perks into their plans, but they're not cheap.

New construction is expensive.

Luxury housing is the main reason for the fact that most developments on the market are expensive. This is because of the rising costs of construction labor. Construction labor demand is at an all-time high, as is the cost of materials is at their highest ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxury structure or in an affordable construction. It's exactly the same price. It's the same." To make sure that affordable housing is available cities are enforcing rules that require developers to incorporate affordable units within their new construction projects. The typical range is between 10 and 20%, based on the number of units and the location. But these rules alone won't result in a significant growth in affordable housing.

What alternatives are there to housing that is affordable? Read this.

Throughout the decades there have been several building boom and bust cycles. There are many apartment buildings built between 1970 and 90 in various areas across the nation. While they may seem outdated compared to current construction but the "bonesare still in good condition. The buildings built during this time were constructed using modern techniques and materials. They generally need only surface repairs and wear items can be repaired. These communities, as well as the secondary markets that they're in are strategically placed to counterbalance the influx of luxury homes being built and to maintain housing that's relatively affordable. The best part about Class B homes is that they generally excel across all economic climates. If the economy is robust Class C tenants can move into Class B properties. When the economy is in decline, tenants of Class A are forced to move down to more affordable Class B properties. Investors can typically purchase these properties at less than the cost of building and can thus offer a wonderful living space, yet keep the rents in a range that is appealing to tenants with varying income levels.
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