In the last week, CNBC published an article which suggested that "There is an urgent crisis headed our way" within the multifamily real estate sector. According to the article, the luxury market's upper end is too crowded and vulnerable to market corrections or flattening. In fact, apartment developers in the top 150 US cities delivered 395,775 new housing units last year, which marks an increase of 46% year-over-year. About 75-80% of these new units of housing are high-end communities. ,Discover more here.

While living in Boston over the past few years, I've witnessed many major developments being built at a breakneck speed. It's not surprising that the vast majority of these homes are luxurious luxury residences which the average citizen are unable to afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing, as well as the inordinate supply of luxury homes that doesn't cater to the diverse population of the city.

Do these multifamily developments pose danger to the multifamily sector? The threat of Class A new construction is evident if the market is flat but existing Class B & C multifamily communities are uniquely placed to withstand market imbalances and corrections. Let's examine the causes for this boom in luxury, and what happens if the boom ends.

The demand for luxury goods is strong

There are two main reasons to the increasing demand for luxury apartment. Baby boomers and empty nesters are moving into cities such as Boston, Austin & Denver with a keen interest in high-end finishes and amenity-packed buildings. This growth can be attributed to the trend that empty nesters and families with double incomes in the millennial generation are opting to rent instead to purchase. Luxury gyms, concierge service and spas with full-services for pets are now regular. Every time a new construction is completed, 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's not at a cost.

The cost of construction can be expensive.

High-end housing is the primary reason why the majority of developments on the market are high-end. This is because of the increasing cost of construction work. Construction labor is in high demand and materials are priced at their most expensive ever. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't need to be in high-end buildings or low-cost ones." It's exactly the same price. Due to the high cost of cost of labor and materials, and the rise in the value of natural resources developers are forced to build luxury products because the numbers simply don't allow for building anything else. Cities are being forced to adopt laws that force developers to build the right amount of affordable units within their new construction projects. Typically between 10%-20% depending on the number of units and the location. However, these regulations alone do not guarantee a significant increase in the amount of affordable housing.

If Affordable Housing Isn't Built, What is the Alternative? Click this link.

There have been many cycles of boom and bust in the building industry throughout the years. In many areas across the country, you will see a lot of homes built between the 1970's-1990's. Although they may seem outdated in comparison to the modern buildings being constructed in the present however, the "bones" are good. These buildings were built using the most modern materials and techniques. They usually need only surface repairs and wear and tear items can be replaced. These communities and the secondary markets they serve are well placed to counter the influx of luxurious apartments. They also offer affordable housing. These Class B properties are able to perform in any economic climate. If the economy is flourishing Class C tenants are able to move up into Class B homes. If the economy is suffering and Class A tenants are unable to not afford the high rents and are typically forced to move to more affordable Class B properties. These homes are usually accessible for less than price of construction. This lets investors offer a great place to call home while still offering appealing rents that tenants of different incomes can afford.
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