CNBC issued a report this week stating that the multifamily realty market is experiencing an "acute crisis". According to the article the upper-end of the luxury market is overcrowded and susceptible to market declines or flattening. Developers of apartments in the largest 150 US towns delivered 395 775 new housing units during the financial year. This represents an increase of 46% over the previous year. Of these new housing units, nearly 75-80% of them are considered to be luxury communities. ,Clicking here.

I've witnessed many large developments being built at a rapid pace when I lived in Boston over the last few years. It's not surprising that the vast majority of these homes are high-end luxury apartments which the average citizen can't afford. In reality it was the Spotlight Team at the Boston Globe recently published a series of articles that focused on the creation of the "Seaport" neighborhood. The article highlighted the lack of affordable housing as well as an overabundance of luxury housing which does not serve the diverse population within the city.

Do these multifamily developments pose a threat to the multifamily sector? The risk to Class A new construction is evident if the market is flat but the existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances as well as corrections. Let's examine the causes for this luxury boom, and what will happen if it comes to an end.

Luxury demand is strong

There are a couple of key drivers behind the rising 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 high-end finishes and amenity-packed properties. This growth can be attributed to the fact that empty nesters and households with double incomes are opting to rent instead to purchase. The latest gyms, concierge services and full-service spas for pets are becoming more the norm. There is an inordinate number of amenities offered with each new building. Developers are rushing to incorporate these modern perks into their plans, but they're not at a cost.

New construction is expensive

High-end housing is the primary reason for the fact that most developments on the market are expensive. This is because of the increasing cost of construction work. The demand for construction labor is at an all-time high, and the cost of materials is at their highest ever been. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or low-cost ones." It's the same price. Due to the high cost of prices for labor and materials as well as the rise in the value of raw land developers are required to construct luxury homes due to the fact that the numbers do not make sense to construct any other kind of building. To ensure affordable housing, cities are enforcing regulations that require developers to include affordable units in construction plans. Typically between 10%-20% depending on the number of units and location. This will not result in an increase in housing for the poor.

What are the alternatives to housing that is affordable? Read more.

There have been numerous boom and bust cycles in the building industry throughout the years. You will find many apartments constructed between 1970 and 1990 in various cities across the United States. Although they may seem old-fashioned when compared to the buildings that are being built nowadays, they're "bones" are quite good. Built during this period were constructed using advanced materials and techniques. They usually only require surface rehabilitation and wear items can be replaced. These communities, as well as the secondary markets they're in are strategically placed to counterbalance the influx of luxury homes being built and to maintain housing that's relatively affordable. The great thing about these Class B homes is that they generally are able to perform well across all economic climates. If the economy is flourishing, Class C tenants are able to move into Class B homes. If the economy is in decline and Class A tenants are unable to not afford the high rents and are typically forced to move to more affordable Class B properties. Investors can typically buy these homes for a fraction of the cost of building they can offer a wonderful living space, yet ensure that rents remain affordable to tenants of many income ranges.
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