The week before, CNBC published an article suggesting that "There is an urgent crisis that is coming our way" in the multifamily real estate market. The article surmises that the top end of the market for luxury is overbuilt and vulnerable to a flattening or market correction. Apartment developers in the 150 largest US towns delivered 395 775 new housing units last financial year. This is a 46% increase over the previous year. In these new housing units, nearly 75-80% of them are considered luxury communities. ,Read more here.

I've seen many major developments being built at a rapid pace while living in Boston over the last few years. A majority of these developments are luxury homes that most people cannot afford. In fact it was the Spotlight Team at the Boston Globe recently published a number of articles that focused on the development of the new "Seaport" neighborhood. The article pointed out the absence of affordable housing and an overabundance of luxury housing that do not meet the needs of the diverse population within the city.

With the arrival of all of these new luxurious multifamily homes, does this put the entire multifamily market at risk of flattening or collapse? If the market slows down it could be a problem of a collapse for Class A new construction. However existing Class B & C multifamily communities are able to withstand market corrections and imbalances. Let's examine the reasons for such a luxury boom and what could happen when demand slows.

Demand for luxury is on the rise

There are a few key drivers behind the demand for luxury apartments. Generation Y and empty nester baby boomers are moving to cities such as Boston and Austin as well as Denver, with a taste for high-end finishes and luxurious buildings. One reason for this growth is that a lot of double-income millennial households and empty nesters who can afford to purchase are choosing to rent. Luxury gyms, concierge service and spas with full-services for pets are all becoming regular. With every new development it appears that there is an amenities arms race. Developers are actively incorporating modern amenities into their projects; however they're not at a cost.

The cost of construction can be expensive.

The reason the vast majority of the new housing complexes you see that are on the market is expensive is because of the increasing price of construction labor and materials. Construction labor is highly sought-after and the materials are at their most expensive ever. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't need to be in high-end structures or in affordable ones." It's the same cost. As a result of high cost of labor and materials, and the rising value of the raw land developers are obliged to build luxurious products because the numbers simply don't allow for building any other kind of building. To ensure affordable housing, cities are enforcing regulations that require developers to include affordable units in their construction plans. The average number of units as well as the location determines how much they charge. But, on their own, these rules will not provide a meaningful increase in the number of affordable housing.

What alternatives are there for affordable housing? Homepage.

There have been numerous cycles of boom and bust in the building industry over the years. In numerous markets across the country, you'll find a large number of homes built between the 1970's and the 1990's. While these homes may appear out-of-date compared to the current construction but the "bonesare still in good condition. These buildings were constructed with modern materials and techniques. They generally only require surface rehabilitation and wear and tear items can be replaced. These communities, as well as the secondary markets that they're in, are positioned well to counterbalance the influx of new luxury apartments and provide housing that's fairly affordable. The benefit of these Class B homes is that they tend to are able to perform well in all economic climates. When the economy is strong, Class C tenants are able to move into Class B homes. If the economy is struggling and Class A tenants are unable to no longer justify the luxury rents and typically move down to more affordable Class B properties. Investors can usually buy these homes for a fraction of the cost of building, which allows them to provide a great place to live yet still keep the rents at a level attractive to tenants with varying income ranges.
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