CNBC published a report this week that said that the multifamily real estate sector is facing an "acute crisis". According to the article, the upper-end of the luxury market is too crowded and vulnerable to market corrections or flattening. In fact, apartment developers in the top 150 US cities delivered 395,775 new housing units last year, which represents an increase of 46% Y-o-Y. Of these new units of housing, about 75-80% of them are classified as luxury communities. ,Visit here.

In my time in Boston during the last couple of years, I've witnessed several major developments being constructed at an incredibly rapid pace. As a result, the overwhelming majority of these properties are high-end luxury apartments that the average person cannot afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article pointed out the absence of affordable housing, as well as the overabundance of luxury homes that does not cater to the diverse population in the city.

Are these multifamily developments a threat to the multifamily industry? The risk of Class A new construction is obvious if the market flattens but the existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances as well as corrections. Let's examine why there has been such an unprecedented growth in the luxury market and what happens when demand slows.

The demand for luxury goods is high.

There are two main reasons for the rising demand for luxury homes. Millennials and empty-nester baby boomers are moving into cities like Boston, Austin & Denver with a discerning taste for luxury finishes and luxurious structures. This growth is due to the fact that empty nesters and families with double incomes in the millennial generation are opting to rent instead than buy. The latest gyms, concierge services and full-service spas for pet owners are becoming more commonplace. With every new development it appears that there's an arms race. Modern amenities are being included in developers' projects rapidly and aren't cheap.

New construction is expensive.

High-end housing is the primary reason for the fact that most developments on the market are high-end. This is because of the increasing costs of construction labor. Construction is a high-demand industry and materials are at their highest price ever. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxurious building or in a budget-friendly construction. It's exactly the same price. Due to the high cost of cost of labor and materials, and the rise in the value of raw land developers are being obliged to build luxurious products since the numbers don't allow for building any other kind of building. To provide affordable housing cities are enforcing rules which require developers to build affordable units within their construction plans. The typical range is between 10 and 20%, based on unit count and location. But these rules alone won't result in a significant increase in the number of affordable housing.

What alternatives are there for affordable housing? Visit.

Over the past few decades, there has been building booms and busts. There are many apartments built between 1970 and 90 in various cities across the nation. While they may seem old-fashioned compared to modern construction but the "bonesare still in good condition. These buildings were built using the most advanced materials and techniques. They typically need only surface repairs and wear items can be replaced. These apartment communities, and the secondary markets that they're in are well-positioned to counterbalance the influx of new luxury apartments and to maintain housing that's fairly affordable. The best part about Class B homes is that they generally are able to perform well across all economic climates. When the economy is strong Class C tenants can shift to Class B properties . When the economy is in decline and Class A tenants are unable to find it difficult to justify the extravagant rents and are typically forced to move to more affordable class B properties. These homes are usually available for less than the cost of building. This lets investors offer a great location to live in and yet still pay appealing rents that tenants of different incomes can afford.
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