CNBC published a report this week that said that the multifamily real estate sector is experiencing an "acute crisis". The article surmises that the top end of the market for luxury is over-built and prone to a flattening or market correction. In reality, apartment builders in the 150 largest US cities delivered 395,775 new housing units last year, which represents a 46% increase Y-o-Y. Of these new units of housing, about 75-80% are considered luxury communities. ,Read more here.

I've seen a lot of major developments built at breakneck speed when I lived in Boston over the last few years. A majority of these developments are expensive luxury apartments that the majority of people are unable to afford. In actuality it was the Spotlight Team at the Boston Globe recently published a series of pieces that focused on the creation of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing and the inordinate supply of luxury homes that doesn't cater to its diverse population.

Are these multifamily developments an imminent threat to the multifamily market? 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 withstand market imbalances and corrections. Let's go through the reasons behind why there's been a luxury boom and what will happen if demand subsides.

Demand for luxury is on the rise

There are two major reasons of the growing demand for luxurious apartment. Generation Y and empty nester baby boomers are moving to cities such as Boston, Austin, and Denver with a discerning palate for luxurious finishes and amenities-packed structures. This growth is due to the reality that empty-nesters and households with double incomes prefer renting rather to purchase. Luxury gyms, concierge service and full-service spas for pets are becoming more commonplace. There's an inordinate amount of amenities being offered with every new construction. Developers are aggressively incorporating these types of modern perks into their projects; however it's not cheap.

New construction is expensive.

The reason the overwhelming majority of new homes coming on the market are luxury is due to the rising costs of construction labor and materials. The demand for construction work is at an all-time high, and the cost of building materials is at the highest they've ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury building or in a budget-friendly structure. It costs the same." Because of the high cost of labor and materials, and the rising value of the natural resources, developers are forced to build luxury products since the numbers don't allow for building anything else. Cities are having to enact laws that force developers to build an amount of affordable homes within their new construction projects. The average unit count and the location determines how much they charge. However, these regulations alone will not provide a meaningful increase in the amount of affordable housing.

If Affordable Housing Can't Be Built, what is the Alternative? Visit website.

There have been many boom and bust cycles within the building industry over the years. In numerous markets across the country, you'll find a large number of apartments constructed between the 1970's and 1990's. Although these homes may appear outdated when compared to the buildings that are being built today however, the "bones" are good. These buildings were built using the most advanced materials and techniques. They usually only require surface rehabilitation and wear items can be repaired. These communities and the secondary markets they serve are well placed to counteract the overflow of luxurious homes. They also provide affordable housing. These Class B properties can perform in any economic climate. If the economy is robust, Class C tenants shift to Class B properties. If the economy is in decline, Class A tenants are forced to move down to Class B homes. They are typically accessible for less than cost of building. This permits investors to provide a great location to live in while still offering attractive rents that tenants with different income levels are able to afford.
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