CNBC released a report last week that stated that the multifamily realty sector is in the midst of an "acute crisis". The article surmises that the upper end of the market for luxury is overbuilt and susceptible to a flattening or a market correction. In actuality, apartment developers in the largest 150 US cities constructed 395,775 brand new housing units in the last year, which represents a 46% increase Y-o-Y. The majority of the new units of housing are luxury communities. ,Visit this link.

While living in Boston during the last couple of years, I have witnessed several major developments being constructed in a rapid manner. The majority of these properties are luxury homes which the majority of people can't afford. In actuality, the Spotlight Team at the Boston Globe recently published a number of pieces that focused on the development of the new "Seaport" neighborhood. The article pointed out the absence of affordable housing, as well as an overabundance of luxury housing that do not meet the needs of the diverse population in the city.

With the advent of all of these new luxurious multifamily homes is this putting the entire multifamily sector at risk of flattening or even a collapse? The danger to Class A new construction is evident if the market is flat but existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances as well as corrections. Let's examine the causes of this luxury boom and what will happen if it ends.

Luxury demand is strong

There are two major reasons of the growing demand for luxurious apartment. Millennials and empty nester baby boomers are moving into cities such as Boston and Austin as well as Denver with a discerning palate for luxury finishes and amenities-packed structures. One reason for this growth is that a lot of double-income millennial households and empty nesters that can afford to purchase are choosing to rent. Benefits like high-end fitness centers, concierge services, and fully-service pet spas are now the norm. There is an inordinate number of amenities offered in every new building. Modern facilities are being integrated into developers' projects in a fast-paced manner, but it isn't cheap.

New Construction is Cost Prohibitive

The reason the vast majority of the new homes that are on the market is luxury is due to the increasing cost of construction materials and labor. Construction labor is highly sought-after and the materials are at their highest ever price. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxurious building or in a low-cost construction. It's the same cost. As a result of high cost of labor and materials, and the appreciation of the natural resources developers are required to construct luxury homes because the numbers simply don't make sense to construct any other type of construction. Cities are forced to pass regulations to force developers to create an amount of affordable homes within their construction projects. The average number of units as well as the location will determine much they will charge. But these rules alone will not provide a meaningful increase in the number of affordable housing.

If Affordable Housing isn't Built, What is the Alternative? View source.

Over the past few decades, there has been building booms and busts. You will find many apartments built between 1970 and 1990 in various markets across the country. While they may seem out-of-date compared to the current construction however, the "bonesare still in good condition. These buildings constructed in the frame were built with contemporary materials and techniques, and typically require only surface renovations with the replacement of wear and tear items. These communities and the secondary markets they serve are well placed to counter the influx of luxurious apartments. They also offer affordable housing. The best part about Class B homes is that they generally perform well regardless of the economic conditions. If the economy is robust, Class C tenants are able to move into Class B homes. When the economy is weak, tenants of Class A are forced to move down to more affordable Class B homes. Investors can typically buy these homes for only a small portion of the price of construction and can thus offer a wonderful home, but ensure that rents remain affordable for tenants with different income ranges.
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