In the last week, CNBC published an article suggesting that "There is a crisis of extreme proportions that is coming towards us" in the multifamily real estate industry. According to the article, the market's luxury end is crowded and prone to market fluctuations or flattening. In actuality, apartment developers in the 150 largest US cities constructed 395,775 brand new housing units last year, which represents a 46% increase Y-o-Y. In these new housing units, nearly 75-80% are considered luxury communities. ,Going here.

In my time in Boston in the last few years, I've seen many major developments being built at an incredibly rapid pace. It's not surprising that the vast majority of these are luxurious luxury residences that your average citizens cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing and the excess of luxury housing that doesn't cater to its diverse population.

With the emergence of all these new multi-family luxury properties, does this put the entire multifamily market at risk of a collapse or flattening? If the market flattens, there is a risk of a collapse for Class A new construction. However, existing Class B & C multifamily communities can stand up to market volatility and market imbalances. Let's examine the causes for this boom in luxury, and what happens if the boom ends.

Demand for luxury is on the rise

There are two important factors that drive the increasing demand for luxury homes. Baby boomers are moving to cities like Boston and Austin as well as Denver. They have a keen taste for high-end finishes and luxurious buildings. This growth is due to the trend that empty nesters and double-income millennial households are choosing to rent rather to purchase. Luxury gyms, concierge service and full-service spas for pets are now the norm. It seems like there is an appalling number of amenities offered with each new building. These types of modern facilities are being integrated into the projects of developers at a rapid pace however, it's not cheap.

New construction is expensive

The main reason why the vast majority of the new residential developments that are on the market is luxurious is because of the rising costs of construction labor and building 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. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxurious building or in a budget-friendly building. It's the same cost. It's the same." Cities are forced to pass laws that force developers to build a certain number of affordable units in their new construction projects. Most often, between 10% and 20% based on the number of units and the location. However, these regulations alone will not provide a meaningful growth in affordable housing.

What alternatives are there to affordable housing? Read more.

There have been many boom and bust cycles in the building industry throughout the decades. You will find many apartments built between 1970 and 90 in various markets across the United States. While these homes may appear outdated compared to current construction, the "bonesremain in good shape. Buildings built during this time frame have been constructed with modern techniques and materials. They typically require only surface renovations with the replacement of wear and tear items. These communities and the secondary markets they serve are well-positioned to offset the flood of luxurious homes. They also provide affordable housing. These Class B properties can succeed in any economic situation. When the economy is strong, Class C tenants shift to Class B properties. If the economy is struggling tenants of Class A are forced to relocate to more affordable Class B properties. They are typically offered for less than the cost of building. This allows investors to offer an ideal location to live in while still offering appealing rents that tenants of different income levels are able to afford.
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