In the last week, CNBC published an article which suggested that "There is an urgent crisis that is coming our way" within the multifamily real estate industry. The article suggests that the top end of the luxury market is over-built and prone to flattening or a market correction. In reality, apartment builders in the 150 largest US cities delivered 395,775 new housing units last year, which represents an increase of 46% Y-o-Y. In these new units of housing, about 75-80% of them are considered to be luxury communities. ,Website.

I've seen a lot of major development projects being constructed at an incredible pace when I lived in Boston for the past few years. Not surprisingly, the overwhelming majority of these are high-end luxury apartments that the average person cannot afford. In fact it was 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 that doesn't cater to the diverse population of the city.

Are these multifamily developments a threat to the multifamily market? If the market is flat, 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 causes for this luxury boom, and what will happen if it comes to an end.

The demand for luxury goods is high.

There are a few important factors that drive the increasing demand for luxury homes. Baby boomers and empty nesters are moving into cities like Boston, Austin & Denver with a keen interest in luxury finishes and luxurious buildings. This growth can be attributed to the fact that empty nesters and families with double incomes in the millennial generation are choosing to rent rather than purchase. Perks such as high-end gyms, concierge services and pet spas that are full-service are becoming the standard. With every new development, it seems as though there's an arms race. Developers are aggressively incorporating these modern perks into their plans, but, it doesn't come at a cost.

New construction is expensive.

The main reason why the overwhelming majority of new homes that are on the market is expensive is because of the rising costs of construction labor and materials. The demand for construction labor is at an all-time high, as is the cost of building materials is at the highest they've ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury building or in a low-cost building. It costs the same." It's the identical." Cities are being forced to adopt laws that force developers to construct the right amount of affordable homes within their construction projects. Typically between 10%-20% depending on the number of units and location. But these rules alone won't result in a significant increase in the number of affordable housing.

If Affordable Housing Isn't Constructed, What's the Alternative? Find out more.

Over the past few decades, there have been building boom and bust cycles. There are many apartment buildings built between 1970 and 90 in various areas across the nation. Although they may seem very out of date in comparison to the modern buildings being constructed nowadays however, they're "bones" are in good shape. Built during this period were constructed using modern techniques and materials. They typically need only surface repairs and wear and tear items can be replaced. These communities as well as the secondary markets they serve are well-positioned to offset the flood of luxurious apartments. They also offer affordable housing. These Class B properties can perform in any economic climate. If the economy is flourishing Class C tenants can shift to Class B properties When the economy is in decline, Class A tenants can not afford the high rents and are typically forced to move to more affordable class B properties. Investors can typically purchase these properties at less than the price of construction, which allows them to offer a wonderful home, but maintain rents in a range that is appealing to tenants with varying income ranges.
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