CNBC released a report last week that stated that the multifamily realty market is facing an "acute crisis". According to the report the upper-end of the luxury market is overcrowded and susceptible to market fluctuations or flattening. Developers of apartments in the 150 largest US towns constructed 395 775 new housing units last financial year. This represents a 46% increase over the previous year. In these new housing units, nearly 75-80% of them are considered to be luxury communities. ,Learn more here.

I've seen many major developments built at breakneck speed during my time in Boston in recent years. A majority of these developments are luxury homes which the majority of people can't afford. In fact, the Spotlight Team at the Boston Globe recently published a series of articles that focused on creation of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing, as well as the excess of luxury housing that don't meet the needs of its diverse population.

With the arrival of all these luxurious multifamily homes could this put the entire multifamily market at risk of collapse or flattening? The risk of Class A new construction is evident if the market is flat but the existing Class B & C multifamily communities are uniquely placed to stand up to market imbalances and corrections. Let's examine the causes for this boom in luxury, and what happens if it comes to an end.

The Demand for Luxury is High

There are a few key drivers behind the increasing demand for luxury homes. Millennials and empty nester baby boomers are moving to cities like Boston Austin, Boston, and Denver with a discerning palate for high-end finishes and luxurious structures. One specific reason for this growth is that a lot of double-income households of millennials and empty nesters with the money to buy are choosing to rent. Benefits like high-end gyms, concierge services, and pet spas that are full-service are becoming the standard. It seems like there is an appalling number of amenities offered in every new building. Developers are rushing to incorporate these modern perks into their projects; however, it doesn't come cheap.

New construction is expensive

The main reason why the overwhelming majority of new residential developments coming on the market are luxury is due to the rising price of construction labor and building materials. The demand for construction work is at an all-time high, and the cost of building materials is the most they have ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxurious building or in a budget-friendly structure. It's the same cost. Due to the high cost of prices for labor and materials as well as the appreciation of the raw land developers are being obliged to build luxurious products because the numbers simply don't make sense to construct any other type of construction. Cities are having to enact laws that force developers to build the right amount of affordable units within their new construction projects. Typically between 10%-20% depending on the number of units and the location. This will not result in an increase in affordable housing.

What are the alternatives for affordable housing? Get more info.

Through the years, there have been several building boom and bust cycles. There are many apartment buildings built between 1970 and 1990 in various cities across the nation. While they may seem outdated compared to current construction however, the "bones” are still good. These buildings were constructed with advanced materials and techniques. They usually need only surface repairs and wear-related items are able to be replaced. These communities, as well as the secondary markets they serve are well-positioned to counter the influx of luxury homes. They also offer affordable housing. The best part about Class B homes is that they typically perform well regardless of the economic conditions. When the economy is thriving Class C tenants are able to move up into Class B homes. If the economy is struggling and Class A tenants are unable to no longer justify the luxury rents and are typically forced to move to class B properties. They are typically offered for less than the cost of building. This permits investors to provide the perfect location to live in and still maintain appealing rents that tenants of different income levels can afford.
There are no comments on this page.
Valid XHTML :: Valid CSS: :: Powered by WikkaWiki