CNBC released a report last week that stated that the multifamily realty sector is in the midst of an "acute crisis". The article suggests that the upper tier of the luxury market is over-built and prone to a flattening or a market correction. In reality, apartment builders in the top 150 US cities constructed 395,775 brand new housing units in the last year, which is an increase of 46% year-over-year. In these new homes, around 75-80% of them are classified as luxury communities. ,Learn more here.

When I lived in Boston during the last couple of years, I've witnessed several major developments being constructed at a breakneck speed. The majority of these properties are expensive luxury apartments which the majority of people can't afford. In actuality, the Spotlight Team at the Boston Globe recently released a set of pieces that focused on the creation of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing and the excess of luxury housing which doesn't accommodate the diverse population of the city.

Do these multifamily developments pose an imminent threat to the multifamily industry? The danger of Class A new construction is apparent if the market flattens, however; the existing Class B & C multifamily communities are uniquely positioned to stand up to market imbalances and corrections. Let's look at the reasons the reasons behind why there's been an unprecedented growth in the luxury market and what will happen if demand subsides.

Luxury demand is strong

There are two major reasons of the growing demand for luxury apartments. Generation Y and baby boomers who are empty-nesters are moving into cities like Boston, Austin & Denver with a desire for high-end finishes and amenity-packed structures. This boom is due to the fact that empty nesters and double-income millennial households are opting to rent instead to purchase. The latest gyms, concierge services and full-service spas for pet owners are becoming more regular. With every new development, it seems as though there is an amenities arms race. Developers are rushing to incorporate these types of modern perks into their plans, but they're not at a cost.

New construction is expensive

The primary reason for the vast majority of the new homes being put up for sale is luxurious is because of the rising costs of construction materials and labor. Construction is a high-demand industry and materials are priced at their most expensive ever. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or low-cost ones." It's exactly the same price. Because of the high cost of labor and materials, and the rise in the value of raw land, developers are obliged to build luxurious products because the numbers simply don't allow for building any other type of construction. To ensure affordable housing cities are enforcing rules that require developers to incorporate affordable units within their construction plans. Most often, between 10% and 20% based on the number of units and location. The regulations won't cause an increase in housing for the poor.

If Affordable Housing Isn't Built, what is the alternative? Web site.

There have been many boom and bust cycles in the building industry over the years. There are many apartments built between 1970 and 90 in various markets across the nation. While these homes may appear outdated compared to current construction, the "bonesare still in good condition. The buildings built in the frame have been constructed with modern materials and techniques and typically require only surface renovations with wear items replaced. These communities as well as the secondary markets they serve are well-positioned to counteract the overflow of luxurious apartment buildings. They also provide affordable housing. The best part about Class B homes is that they generally excel in all economic climates. If the economy is flourishing Class C tenants are able to shift to Class B properties When the economy is struggling, Class A tenants can not afford the high rents, and they typically shift to class B properties. They are typically available for less than the price of construction. This lets investors offer the perfect place to call home and still maintain appealing rents that tenants of different income levels can afford.
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