This past week, CNBC published an article in which they claimed that "There is an urgent crisis headed our way" within the multifamily real estate industry. According to the article, the luxury market's upper end is too crowded and vulnerable to market declines or flattening. In fact, apartment developers in the largest 150 US cities built 395,775 new housing units last year, which is an increase of 46% year-over-year. Of these new homes, around 75-80% are classified as luxury communities. ,Learn more.

I've seen a lot of major developments being built at a rapid pace while living in Boston over the last few years. It's not surprising that the vast majority of these homes are luxury homes which the average citizen can't afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing, as well as the overabundance luxury housing which doesn't accommodate its diverse population.

Do these multifamily developments pose an imminent threat to the multifamily market? If the market is flat and the risk of collapse increases, it is for Class A new construction. However, the existing Class B & C multifamily communities can withstand market corrections and imbalances. Let's look at the reasons for this luxury boom, and what happens if it is over.

The Demand for Luxury is High

There are a few key drivers behind the demand for luxury apartments. Baby boomers and empty nesters are flocking to city centers such as Boston, Austin & Denver with a desire for luxury finishes and luxurious structures. This boom is due to the reality that empty-nesters and double-income millennial households are opting to rent instead than buy. Luxury gyms, concierge service and spas with full-services for pets are all becoming the norm. There's an inordinate amount of amenities being offered with each new building. These types of modern amenities are being included in development projects in a fast-paced manner however, it's not cheap.

The cost of construction can be expensive.

The primary reason for the vast majority of the new homes being put up for sale is luxury is due to the rising price of construction materials and labor. Construction labor is highly sought-after and the materials are at their highest price ever. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious buildings or low-cost ones." It's the same price. As a result of high materials and labor costs and the rise in the value of natural resources, developers are forced to build luxury products since the numbers don't allow for building any other type of construction. Cities are having to enact rules that require developers to create an amount of affordable units in their new construction projects. The number of units and the location determines how much they will charge. This will not result in an increase in the number of affordable homes.

If Affordable Housing Can't Be Built, what is the Alternative? Click here.

Through the years, there have been building boom and bust cycles. In many markets around the country, you'll see a lot of apartment buildings built in the 1970's and the 1990's. While these homes may appear out-of-date compared to the current construction but the "bonesare still in good condition. The buildings built during this time were constructed with modern techniques and materials. They usually just require minor repairs, and wear-related items are able to be repaired. These apartment communities, and the secondary markets they're in, are positioned well to counterbalance the flood of luxury new homes and maintain housing that is relatively affordable. These Class B properties are able to perform in any economic climate. If the economy is robust Class C tenants can are able to move into Class B homes. When the economy is in decline tenants of Class A have to shift to Class B homes. They are typically offered for less than the cost of building. This allows investors to offer the perfect place to call home while still offering appealing rents that tenants of different income levels can afford.
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