The week before, CNBC published an article in which they claimed that "There is a crisis of extreme proportions coming towards us" in the multifamily real estate sector. According to the report the luxury market's upper end is overcrowded and susceptible to market declines or flattening. Developers of apartments in the 150 largest US towns constructed 395 775 new housing units during the financial year. This represents an increase of 46% over previous years. The majority of the new housing units are luxurious communities. ,Read more.

While living in Boston over the past few years, I've witnessed several major developments being constructed in a rapid manner. It's not surprising that the vast majority of these homes are luxurious luxury residences which the average citizen are unable to afford. In fact, the Spotlight Team at the Boston Globe recently released a set of articles that focused on the creation of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing as well as the overabundance luxury housing which doesn't accommodate the diverse population of the city.

With the advent of all of these new luxurious multifamily homes is this putting the entire multifamily market at risk of flattening or collapse? The risk of Class A new construction is evident if the market is flat but the the existing Class B & C multifamily communities are uniquely placed to withstand market imbalances and corrections. Let's examine the causes of this luxury boom and what happens if the boom comes to an end.

The Demand for Luxury is High

There are a couple of major factors driving the rising demand for luxury apartments. Baby boomers are making their way to cities like Boston, Austin, and Denver. They have a keen taste for luxurious finishes and amenities-packed properties. The rise in popularity is due to the reality that empty-nesters and double-income millennial households are choosing to rent rather than buy. Luxury gyms, concierge service and full-service spas for pets are all becoming the norm. With every new development, it seems as though there is an amenities arms race. Developers are rushing to incorporate these types of modern perks into their projects; however, it doesn't come cheap.

New Construction is costly.

High-end housing is the primary reason for the fact that most new developments that are on the market are high-end. This is because of the rising costs of construction labor. Construction labor is in high demand and the materials are at their highest price ever. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury structure or in an affordable structure. It's the same price." Due to the high cost of cost of labor and materials, and the rising value of the natural resources developers are being obliged to build luxurious products because the numbers simply don't make sense to construct anything else. To make sure that affordable housing is available cities are enforcing rules which require developers to build affordable units in new construction projects. Most often, between 10% and 20% based on the unit count and location. However, these regulations alone will not provide a meaningful growth in affordable housing.

If Affordable Housing Can't Be Built, What is the alternative? Click here.

There have been numerous cycles of boom and bust within the building industry over the decades. You will find many apartments built between 1970 and 1990 in various cities across the country. Although they may seem old-fashioned compared to what's being built today but the "bones" are quite good. The buildings built in the frame have been constructed with contemporary materials and techniques, and typically require only surface renovations and wear-related items replaced. These apartment communities, and the secondary markets they're located in are well-positioned to take on the flood of luxury new homes and to maintain housing that's fairly affordable. The great thing about these Class B properties is that they typically are able to perform well across all economic climates. When the economy is thriving Class C tenants are able to are able to move into Class B properties . When the economy is suffering the Class A tenants will find it difficult to justify the extravagant rents and typically move down to more affordable class B properties. They are typically accessible for less than price of construction. This allows investors to offer an ideal place to call home and still maintain appealing rents that tenants of different incomes can afford.
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