CNBC issued a report this week that stated that the multifamily realty sector is in the midst of an "acute crisis". According to the article the upper-end of the luxury market is too crowded and vulnerable to market declines or flattening. Apartment developers in the largest 150 US towns constructed 395 775 new housing units during the fiscal year. This represents an increase of 46% compared to the previous year. Of these new housing units, nearly 75-80% of them are considered luxury communities. ,View source.

In my time in Boston during the last couple of years, I've seen numerous major developments being constructed in a rapid manner. A majority of these developments are luxurious luxury residences that the majority of people are unable to afford. In reality, the Spotlight Team at the Boston Globe recently released a set of pieces that focused on the creation of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing and the inordinate supply of luxury homes that doesn't cater to its diverse population.

With the advent of all of these new luxurious multifamily homes could this put the entire multifamily industry at risk of a collapse or flattening? If the market slows down it could be a problem of a collapse 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 of this luxury boom and what happens if the boom is over.

Demand for luxury is on the rise

There are two main drivers for the rising demand for luxurious homes. Generation Y and baby boomers who are empty-nesters are moving into cities like Boston, Austin & Denver with a keen interest in luxurious finishes and amenities-packed buildings. One of the main reasons to this increase is that lots of double-income households of millennials and empty nesters with the money to buy are opting to rent. Facilities like top-of-the-line fitness centers, concierge services and pet spas that are full-service are now the norm. With each new building, it seems as though there is an amenities arms race. Developers are aggressively incorporating modern amenities into their projects; however it's not at a cost.

New construction is expensive.

The main reason why the majority of developments on the market are high-end. This is due to the increasing cost of construction work. Construction is a high-demand industry and the materials are at their highest ever price. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious buildings or affordable buildings." It's priced the same." Due to the high cost of cost of labor and materials, and the appreciation of the raw land developers are forced to build luxury products due to the fact that the numbers do not make sense to construct any other kind of building. To make sure that affordable housing is available, cities are enforcing regulations which require developers to build affordable units in their new construction projects. The average number of units as well as the location will determine how much they will charge. These regulations will not cause an increase in the number of affordable homes.

What are the alternatives to affordable housing? Read this.

There have been numerous cycles of boom and bust within the construction industry over the years. In many markets around the country, you will see a lot of apartments constructed between the 1970's and the 1990's. Although these homes may appear outdated when compared to the buildings that are being built in the present, they're "bones" are in good shape. These buildings were constructed using advanced materials and techniques. They usually need only surface repairs and wear and tear items can be repaired. These apartment communities, and the secondary markets they're in are strategically placed to counterbalance the influx of luxury new homes and to maintain housing that's fairly affordable. These Class B properties can succeed in any economic situation. When the economy is strong Class C tenants can move up into Class B properties . When the economy is suffering the Class A tenants will find it difficult to justify the extravagant rents and are typically forced to move to more affordable Class B properties. Investors are able to purchase these properties at less than the cost to build they can provide a great living space, yet keep the rents at a level attractive to tenants with varying income levels.
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