CNBC released a report last week that said 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 flattening or a market correction. In fact, apartment developers in the 150 largest US cities built 395,775 new housing units in the last year, which marks a 46% increase Y-o-Y. About 75-80% of these new housing units are high-end communities. ,Read this.

I've seen many major developments built at breakneck speed during my time in Boston over the last few years. Not surprisingly, the overwhelming majority of these are luxurious luxury residences that your average citizens can't afford. In fact, the Spotlight Team at the Boston Globe recently released a set of articles that focused on growth of the "Seaport" neighborhood. The article highlighted the lack of affordable housing and an abundance of luxury houses that does not cater to the diverse population within the city.

With the advent of all of these new luxurious multifamily homes could this put the entire multifamily market at risk of a flattening or collapse? If the market slows down and the risk of collapse increases, it is for Class A new construction. However the existing Class B & C multifamily communities are able to withstand market volatility and market imbalances. Let's examine the causes of this luxury boom and what happens if the boom is over.

The demand for luxury goods is strong

There are two main reasons of the growing demand for luxury apartments. Millennials and empty nester baby boomers are moving to cities such as Boston and Austin as well as Denver with a discerning palate for luxury finishes and amenities-packed buildings. This boom can be attributed to the fact that empty nesters and families with double incomes in the millennial generation are opting to rent instead to purchase. Perks such as high-end gyms, concierge services and fully-service pet spas are becoming the standard. With each new building it appears that there's an arms race. These kinds of modern facilities are being integrated into the projects of developers rapidly however, it's not cheap.

New construction is expensive.

The primary reason for the overwhelming majority of new housing complexes you see being put up for sale is expensive is because of the ever-rising costs of construction labor and materials. Construction labor is in high demand and materials are priced at their most expensive ever. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or low-cost ones." It's the same cost. It's the same." To ensure affordable housing cities are enforcing rules that require developers to include affordable units in their construction plans. The number of units and the location determines how much they will charge. However, these regulations alone won't result in a significant increase in the amount of affordable housing.

What are the alternatives to housing that is affordable? Clicking here.

Over the past few decades, there have been several building booms and busts. There are many apartment buildings built between 1970 and 90 in various markets across the nation. Although these properties might seem out-of-date compared to the current construction but the "bones” are still good. The buildings built during this time were constructed with modern materials and techniques. They usually need only surface repairs and wear-related items are able to be repaired. These communities as well as their secondary markets are well-positioned to offset the flood of luxury apartments. They also offer affordable housing. The great thing about these Class B homes is that they typically perform well across all economic climates. When the economy is strong Class C tenants are able to move into Class B properties. If the economy is struggling Class A tenants are forced to move down to Class B homes. These properties are often offered for less than the price of construction. This allows investors to offer a great property to live in while still offering attractive rents that tenants of different income levels can afford.
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