In the last week, CNBC published an article which suggested that "There is an acute crisis that is coming our way" in the multifamily real estate industry. The article concludes that the upper end of the market for luxury is over-built and prone to a flattening or a market correction. In actuality, apartment developers in the top 150 US cities built 395,775 new housing units last year, which marks an increase of 46% Y-o-Y. About 75-80% of these new units of housing are high-end communities. ,Homepage.

When I lived in Boston during the last couple of years, I've witnessed several major developments being constructed at an incredibly rapid pace. A majority of these developments are expensive luxury apartments that most people cannot afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article highlighted its lack of affordable housing and an abundance of luxury houses that does not cater to the diverse population in the city.

Are these multifamily developments a threat to the multifamily sector? The threat of Class A new construction is evident if the market is flat but the existing Class B & C multifamily communities are uniquely placed to stand up to market imbalances and corrections. Let's examine why there has been such an increase in luxury and what will happen if demand subsides.

Demand for luxury is on the rise

There are two important factors that drive the rising demand for luxury apartments. Generation Y and baby boomers who are empty-nesters are flocking to city centers such as Boston, Austin & Denver with a discerning taste for high-end finishes and amenity-packed buildings. One reason for this growth is that many double income households, as well as empty nesters that can afford to buy are choosing to rent. Perks such as high-end fitness centers, concierge services, and fully-service pet spas are becoming the standard. With every new development there is a sense that there is an amenities arms race. Developers are rushing to incorporate these modern perks into their plans, but, it doesn't come inexpensively.

New Construction is Cost Prohibitive

High-end housing is the primary reason why the majority of new developments you see on the market are high-end. This is because of the rising costs of construction labor. 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. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't need to be in high-end buildings or low-cost ones." It's the same price. It's the same." To ensure affordable housing, cities are enforcing regulations that require developers to incorporate affordable units in their construction plans. The typical range is between 10 and 20%, based on unit count and location. But these rules alone do not guarantee a significant increase in the amount of affordable housing.

If Affordable Housing Isn't Built, What is the Alternative? Get more info.

Through the years, there have been building boom and bust cycles. There are many apartments constructed between 1970 and 1990 in various areas across the United States. Although these homes may appear very out of date in comparison to the modern buildings being constructed today, they're "bones" are good. Buildings built during this time frame were built with contemporary materials and techniques, and typically require only surface renovations with wear items replaced. These communities and their secondary markets are well placed to counteract the overflow of luxurious homes. They also offer affordable housing. The Class B homes are able to thrive in any economic environment. If the economy is robust, Class C tenants are able to move into Class B homes. If the economy is struggling, tenants of Class A have to shift to Class B homes. They are typically accessible for less than cost of building. This allows investors to offer a great location to live in and yet still pay attractive rents that tenants with different incomes can afford.
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