CNBC released a report last week that stated that the multifamily realty sector is experiencing an "acute crisis". According to the report the upper-end of the luxury market is crowded and prone to market fluctuations or flattening. In reality, apartment builders in the top 150 US cities constructed 395,775 brand new housing units last year, which marks an increase of 46% Y-o-Y. Nearly 75-80% of these new homes are in luxury communities. ,Click here.

While living in Boston during the last couple of years, I've witnessed several major developments being constructed at an incredibly rapid pace. A majority of these developments are luxury homes that most people cannot afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing, as well as the excess of luxury housing that doesn't cater to the diverse population of the city.

With the emergence of all of these new luxury multifamily properties could this put the entire multifamily industry at risk of collapse or flattening? If the market slows down, there is a risk for Class A new construction. However the existing Class B & C multifamily communities can stand up to market fluctuations and imbalances. Let's examine the reasons behind why there's been a luxury boom and what happens if demand subsides.

The demand for luxury goods is high.

There are two key drivers behind the demand for luxury apartments. Generation Y and empty nester baby boomers are making their way to cities such as Boston and Austin as well as Denver, with a taste for luxurious finishes and amenities-packed buildings. This boom can be attributed to the trend that empty nesters and double-income millennial households prefer renting rather than buy. The latest gyms, concierge services and spas with full-services for pets are becoming more commonplace. With every new development there is a sense that there's an arms race. Developers are rushing to incorporate these types of modern perks in their developments, however it's not at a cost.

Construction costs are high for new construction.

The primary reason for the vast majority of the new housing complexes you see coming on the market are expensive is because of the increasing price of construction labor and building materials. Construction labor is highly sought-after and materials are priced at their highest ever price. According to 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 building. It's the same price. It's the same." To provide affordable housing cities are now enforcing laws which require developers to build affordable units in their construction plans. The number of units and the location will determine the developers will be able to charge. But, on their own, these rules won't result in a significant growth in affordable housing.

What are the alternatives to affordable housing? Read more.

Through the years, there has been building booms and busts. You will find many apartments built between 1970 and 1990 in various areas across the nation. Although these homes may appear very out of date compared to what's being built today but the "bones" are good. Buildings built during this time frame have been constructed with contemporary materials and techniques, and typically only need surface rehabbing with wear items replaced. These communities, as well as the secondary markets they serve are well-positioned to counteract the overflow of luxury apartments. They also offer affordable housing. The best part about Class B homes is that they tend to are able to perform well in all economic climates. When the economy is strong Class C tenants can move up into Class B properties When the economy is in decline and Class A tenants are unable to not afford the high rents, and they typically shift to more affordable Class B properties. They are typically offered for less than the price of construction. This allows investors to offer the perfect property to live in while still offering appealing rents that tenants of different income levels can afford.
There are no comments on this page.
Valid XHTML :: Valid CSS: :: Powered by WikkaWiki