Why Are There So Many Luxurious Apartment Buildings Being Constructed:EITW

CNBC published a report this week stating that the multifamily real estate sector is in the midst of an "acute crisis". The article suggests that the top end of the luxury market is over-built and prone to a flattening or a market correction. Developers of apartments in the top 150 US towns built 395 775 housing units in the last fiscal year. This is an increase of 46% compared to the previous year. Of these new homes, around 75-80% are considered to be luxury communities. ,Discover more here.

While living in Boston during the last couple of years, I have witnessed numerous major developments being constructed at an incredibly rapid pace. Not surprisingly, the overwhelming majority of these properties are luxury homes which the average citizen cannot afford. In fact it was the Spotlight Team at the Boston Globe recently published a number of articles that focused on the growth of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing and the excess of luxury housing which doesn't accommodate its diverse population.

With the emergence of all of these new multi-family luxury properties is this putting the entire multifamily sector at risk of a flattening or even a collapse? If the market slows down and the risk of collapse increases, it is of a collapse for Class A new construction. However, the existing Class B & C multifamily communities can withstand market corrections and imbalances. Let's examine the causes of this luxury boom and what will happen if it is over.

The demand for luxury goods is high.

There are two main drivers of the growing demand for luxurious apartment. Millennials and empty-nester baby boomers are flocking to city centers such as Boston, Austin & Denver with a keen interest in high-end finishes and amenity-packed properties. This boom can be attributed to the trend that empty nesters and families with double incomes in the millennial generation are opting to rent instead than purchase. High-end gyms, concierge services and full-service spas for pets are becoming more commonplace. There is an appalling amount of amenities being offered in every new building. These kinds of modern amenities are being included in the projects of developers in a fast-paced manner and aren't cheap.

New construction is expensive

The reason the overwhelming majority of new homes that are on the market is expensive is because of the increasing cost of construction labor and materials. Construction is a high-demand industry and materials are at their highest price ever. As 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 budget-friendly structure. It's the same cost. It's the identical." To make sure that affordable housing is available cities are now enforcing laws that require developers to incorporate affordable units within their construction plans. Typically between 10%-20% depending on unit count and location. The regulations won't lead to an increase in affordable housing.

What alternatives are there for affordable housing? Get more info.

Throughout the decades there have been several building boom and bust cycles. In numerous markets across the country, you'll notice large numbers of homes built between the 1970's and the 1990's. Although these properties might seem outdated compared to current construction however, the "bonesremain in good shape. Buildings built during this time frame were built with modern materials and techniques and typically require only surface renovations with wear items replaced. These apartment communities, and the secondary markets they're located in, are positioned well to take on the flood of luxury homes being built and maintain housing that is relatively affordable. The benefit of these Class B properties is that they typically perform well regardless of the economic conditions. If the economy is robust Class C tenants are able to move into Class B properties. When the economy is weak, tenants of Class A are forced to relocate to more affordable Class B properties. Investors can typically purchase these properties for less than the cost of building, which allows them to provide a great living space, yet ensure that rents remain in a range that is appealing to tenants of many income levels.

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