CNBC issued a report this week that stated that the multifamily real estate sector is experiencing an "acute crisis". The article surmises that the upper tier of the luxury market is overbuilt and vulnerable to a flattening or market correction. In fact, apartment developers in the largest 150 US cities delivered 395,775 new housing units in the last year, which is a 46% increase Y-o-Y. The majority of the new homes are in luxurious communities. ,Learn more here.

I've seen many major development projects being constructed at an incredible pace while living in Boston over the last few years. It's not surprising that the vast majority of these properties are high-end luxury apartments that the average person 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 as well as the excess of luxury housing which doesn't accommodate the diverse population of the city.

Do these multifamily developments pose an imminent threat to the multifamily sector? The threat of Class A new construction is apparent if the market flattens, however; existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances and corrections. Let's examine why there has been such a luxury boom and what will happen when demand slows.

The Demand for Luxury is High

There are two main drivers for the rising demand for luxurious apartments. Millennials and empty nester baby boomers are moving to cities such as Boston Austin, Boston, and Denver with a discerning palate for luxurious finishes and amenities-packed properties. One specific reason for this growth is that a lot of double-income households, as well as empty nesters that can afford to buy are opting to rent. High-end gyms, concierge services and spas with full-services for pets are all becoming regular. It seems like there is an appalling amount of amenities being offered in every new building. These kinds of modern amenities are being incorporated into development projects at a rapid pace, but it isn't cheap.

The cost of construction can be expensive.

The main reason that the majority of new developments that are in the marketplace are of high-end quality. This is because of the rising cost of construction labor. Construction labor is highly sought-after and materials are priced at their highest ever price. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't need to be in high-end structures or in affordable ones." It's priced the same." Because of the high materials and labor costs and the rise in the value of raw land developers are forced to build luxury products due to the fact that the numbers do not allow for building any other type of construction. Cities are forced to pass regulations to force developers to construct the right amount of affordable homes within their new construction projects. The average unit count and the location will determine much they charge. However, these regulations alone will not provide a meaningful growth in affordable housing.

What alternatives are there to affordable housing? Learn more.

Throughout the decades there have been several building boom and bust cycles. In many areas across the country, you'll see a lot of homes built between the 1970's and the 1990's. Although these homes may appear old-fashioned in comparison to the modern buildings being constructed today however, they're "bones" are in good shape. The buildings built during this time were constructed with modern techniques and materials. They usually only require surface rehabilitation and wear and tear items can be repaired. These communities as well as their secondary markets are well-positioned to offset the flood of luxurious homes. They also provide affordable housing. These Class B properties are able to perform in any economic climate. When the economy is thriving Class C tenants are able to move up into Class B properties When the economy is in decline, Class A tenants can no longer justify the luxury rents and typically move down to Class B properties. Investors can usually purchase these properties for less than the cost of building, which allows them to offer a wonderful place to live yet still ensure that rents remain affordable to tenants with varying income ranges.
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