CNBC issued a report this week stating that the multifamily realty market is facing an "acute crisis". The article surmises that the top end of the market for luxury is overbuilt and vulnerable to flattening or a market correction. Developers of apartments in the largest 150 US towns constructed 395 775 new housing units in the last fiscal year. This is an increase of 46% over the previous year. Of these new homes, around 75-80% of them are considered to be luxury communities. ,Read more.

I've seen a lot of major developments being built at a rapid pace when I lived in Boston over the last few years. Most of these homes are expensive luxury apartments that the majority of people are unable to afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing as well as the excess of luxury housing that don't meet the needs of the diverse population of the city.

With the arrival of all of these new multi-family luxury properties could this put the entire multifamily market at risk of flattening or even a collapse? The risk to Class A new construction is apparent if the market flattens but existing Class B & C multifamily communities are uniquely positioned to stand up to market imbalances and corrections. Let's examine the causes of this luxury boom and what happens if the boom ends.

Luxury Demand is Strong

There are a couple of key drivers behind the demand for luxury apartments. Millennials and empty nester baby boomers are moving to cities like Boston and Austin as well as Denver, with a taste for luxurious finishes and amenities-packed structures. One of the main reasons for this boom is that a lot of double-income millennial households and empty nesters who can afford to buy are opting to rent. High-end gyms, concierge services and full-service spas for pets are now the norm. It seems like there is an appalling quantity of amenities available with every new construction. Developers are aggressively incorporating these modern perks in their developments, however, it doesn't come cheap.

New construction is expensive.

The reason the vast majority of the new housing complexes you see that are on the market is luxury is due to the increasing price of construction labor and materials. Construction labor is highly sought-after and materials are at their highest price ever. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious buildings or low-cost ones." It's exactly the same price. Because of the high materials and labor costs and the rising value of the natural resources developers are obliged to build luxurious products because the numbers simply don't allow for building any other kind of building. Cities are forced to pass regulations to force developers to construct a certain number of affordable units in their construction projects. The typical range is between 10 and 20%, based on the number of units and location. These regulations will not cause an increase in the number of affordable homes.

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

There have been many boom and bust cycles in the construction industry over the decades. There are many apartments constructed between 1970 and 1990 in various cities across the nation. Although these homes may appear very out of date in comparison to the modern buildings being constructed nowadays, they're "bones" are in good shape. These buildings constructed in the frame were built with modern techniques and materials. They typically require only surface renovations and wear-related items replaced. These communities, as well as the secondary markets they're in are well-positioned to counterbalance the flood of new luxury apartments and maintain housing that is relatively affordable. These Class B properties can thrive in any economic environment. When the economy is strong Class C tenants are able to move into Class B properties. If the economy is weak tenants of Class A are forced to relocate to more affordable Class B homes. These homes are usually accessible for less than price of construction. This allows investors to offer an ideal property to live in and still maintain appealing rents that tenants of different income levels are able to afford.
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