This past week, CNBC published an article suggesting that "There is a crisis of extreme proportions headed towards us" within the multifamily real estate sector. 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 largest 150 US cities built 395,775 new housing units last year, which is an increase of 46% Y-o-Y. About 75-80% of these new housing units are luxurious communities. ,Click this link.

I've witnessed many large developments built at breakneck speed while living in Boston over the last few years. It's not surprising that the vast majority of these are luxurious luxury residences that the average person can't afford. In reality, the Spotlight Team at the Boston Globe recently published a number of articles that focused on development of the new "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 of these new luxurious multifamily homes could this put the entire multifamily sector at risk of a collapse or flattening? If the market flattens and the risk of collapse increases, it is for Class A new construction. However, existing Class B & C multifamily communities are able to withstand market corrections and imbalances. Let's look at the reasons for this boom in luxury, and what happens if the boom is over.

Demand for luxury is on the rise

There are two major reasons to the increasing demand for luxurious apartments. Generation Y and empty nester baby boomers are making their way to cities like Boston Austin, Boston, and Denver, with a taste for luxurious finishes and amenities-packed properties. This growth is due to the trend that empty nesters and households with double incomes are opting to rent instead to purchase. Benefits like high-end gyms, concierge services and fully-service pet spas are becoming standard. There's an appalling number of amenities offered with each new building. Developers are aggressively incorporating these modern perks into their plans, but they're not cheap.

New Construction is Cost Prohibitive

The main reason why the majority of new residential developments coming on the market are luxurious is because of the increasing costs of construction materials and labor. The demand for construction work is at an all-time high, and the price of building materials is at the highest they've ever been. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious buildings or low-cost ones." It's exactly the same price. Because of the high prices for labor and materials as well as the rising value of the raw land, developers are obliged to build luxurious products because the numbers simply don't make sense to construct any other type of construction. To provide affordable housing cities are enforcing rules which require developers to build affordable units within their construction plans. The average number of units as well as the location will determine much they will charge. However, these regulations alone do not guarantee a significant increase in the amount of affordable housing.

What alternatives are there to housing that is affordable? Read this.

There have been numerous boom and bust cycles within the building industry over the years. There are many apartment buildings built between 1970 and 1990 in various cities across the country. 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 techniques and materials. They usually just require minor repairs, and wear items can be replaced. These apartment communities, and the secondary markets they're located in are strategically placed to counterbalance the flood of luxury new homes and provide housing that's relatively affordable. The best part about Class B homes is that they tend to perform well in all economic climates. If the economy is robust, Class C tenants shift to Class B properties. If the economy is in decline Class A tenants have to shift to more affordable Class B properties. They are typically accessible for less than price of construction. This permits investors to provide a great location to live in and yet still pay attractive rents that tenants with different income levels can afford.
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