The week before, CNBC published an article suggesting that "There is a crisis of extreme proportions coming our way" in the multifamily real estate industry. The article suggests that the upper tier of the luxury market is overbuilt and vulnerable to flattening or a market correction. In actuality, apartment developers in the 150 largest US cities delivered 395,775 new housing units in the last year, which represents an increase of 46% year-over-year. Nearly 75-80% of these new housing units are luxury communities. ,Click here.

In my time in Boston in the last few years, I have witnessed many major developments being built at a breakneck speed. The majority of these properties are expensive luxury apartments which the majority of people can't afford. In actuality there is a reason why the Spotlight Team at the Boston Globe recently released a set of articles that focused on growth of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing and the inordinate supply of luxury homes which doesn't accommodate the diverse population of the city.

Do these multifamily developments pose an imminent threat to the multifamily sector? 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 are able to withstand market fluctuations and imbalances. Let's examine why there has been such an unprecedented growth in the luxury market and what could happen if demand subsides.

The demand for luxury goods is high.

There are two key drivers behind the demand for luxury apartments. Millennials and empty-nester baby boomers are descending on city centers such as Boston, Austin & Denver with a keen interest in luxurious finishes and amenities-packed buildings. One specific reason for this growth is that a lot of double-income households, as well as empty nesters that can afford to buy are opting to rent. Benefits like high-end fitness centers, concierge services and pet spas that are full-service are becoming the standard. With every new development there is a sense that there is an amenities arms race. Developers are rushing to incorporate these modern perks in their developments, however it's not at a cost.

New construction is expensive.

The primary reason for the vast majority of the new residential developments coming on the market are luxury is due to the ever-rising cost of construction labor and building materials. The demand for construction labor is at an all-time high, and the cost of building materials is at the highest they've ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious structures or in affordable ones." It costs the same." It costs the same." To provide affordable housing, cities are enforcing regulations which require developers to build affordable units in new construction projects. The number of units and the location will determine much they will charge. However, these regulations alone won't result in a significant increase in the number of affordable housing.

If Affordable Housing isn't Constructed, What's the alternative? Clicking here.

Over the past few decades, there have been several building boom and bust cycles. You will find many apartments built between 1970 and 90 in various cities across the United States. While they may seem out-of-date compared to the current construction, the "bonesare still in good condition. Built during this period were constructed using modern materials and techniques. They typically just require minor repairs, and wear items can be replaced. These communities and the secondary markets they serve are well placed to offset the flood of luxury apartments. They also provide affordable housing. These Class B properties are able to perform in any economic climate. If the economy is robust Class C tenants can shift to Class B properties. When the economy is struggling, Class A tenants have to shift to more affordable Class B properties. They are typically accessible for less than cost of building. This lets investors offer an ideal place to call home and yet still pay appealing rents that tenants of different incomes can afford.
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