The week before, CNBC published an article suggesting that "There is an acute crisis that is coming towards us" within the multifamily real estate industry. The article suggests that the upper tier of the luxury market is overbuilt and susceptible to flattening or a market correction. Apartment developers in the largest 150 US towns built 395 775 new housing units last financial year. This is an increase of 46% compared to previous years. Nearly 75-80% of these new homes are in high-end communities. ,Click here.

I've seen many major developments being built at a rapid pace 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 are unable to afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article highlighted the lack of affordable housing as well as the overabundance of luxury homes that do not meet the needs of the diverse population within the city.

With the emergence of all these luxury multifamily properties is this putting the entire multifamily sector at risk of a flattening or collapse? The risk to Class A new construction is obvious if the market flattens but the the existing Class B & C multifamily communities are uniquely placed to stand up to market imbalances and corrections. Let's look at the reasons why there has been such a luxury boom and what will happen when demand slows.

Luxury Demand is Strong

There are two main drivers for the rising demand for luxurious apartment. Millennials and empty-nester baby boomers are flocking to city centers like Boston, Austin & Denver with a desire for luxury finishes and luxurious properties. One specific reason for this growth is that a lot of double-income millennial households and empty nesters with the money to buy are choosing to rent. Luxury gyms, concierge service and full-service spas for pets are now regular. With every new development, it seems as though there's an arms race. These types of modern amenities are being included in developers' projects in a fast-paced manner however, it's not cheap.

New Construction is Cost Prohibitive

High-end housing is the primary reason for the fact that most developments on the market are high-end. This is due to the increasing costs of construction labor. Construction labor is highly sought-after and materials are priced at their highest price ever. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxury building or in an affordable building. It's the same cost. Due to the high cost of prices for labor and materials as well as the appreciation of the natural resources, developers are required to construct luxury homes due to the fact that the numbers do not allow for building any other kind of building. To make sure that affordable housing is available cities are now enforcing laws which require developers to build affordable units in their new construction projects. Most often, between 10% and 20% based on the unit count and location. The regulations won't result in an increase in the number of affordable homes.

If Affordable Housing isn't Constructed, What's the alternative? Read more.

Over the past few decades, there have been several building boom and bust cycles. In many markets around the country, you'll find a large number of apartments constructed between the 1970's and the 1990's. Although they may seem old-fashioned compared to what's being built in the present, the "bones" are good. These buildings constructed in the frame were built with modern materials and techniques and typically only need surface rehabbing and wear-related items replaced. These communities as well as their secondary markets are well placed to offset the flood of luxury homes. They also offer affordable housing. These Class B properties can perform in any economic climate. If the economy is robust, Class C tenants shift to Class B properties. When the economy is weak, Class A tenants have to shift to Class B properties. They are typically offered for less than the cost of building. This permits investors to provide a great location to live in while still offering attractive rents that tenants of different incomes can afford.
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