CNBC issued a report this week that said that the multifamily realty sector is in the midst of an "acute crisis". According to the report the upper-end of the luxury market is crowded and prone to market declines or flattening. Apartment developers in the top 150 US towns constructed 395 775 new housing units last financial year. This is an increase of 46% over the previous year. In these new units of housing, about 75-80% of them are considered to be luxury communities. ,Read more.

I've seen a lot of major developments being built at a rapid pace during my time in Boston over the last few years. Most of these homes are luxury homes which the majority of people can't afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article pointed out the absence of affordable housing, as well as an overabundance of luxury housing that does not cater to the diverse population of the city.

With the arrival of all of these new luxury multifamily properties could this put the entire multifamily sector at risk of flattening or collapse? The risk of Class A new construction is evident if the market is flat, however; the existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances and corrections. Let's examine the causes of this luxury boom and what happens if the boom ends.

The demand for luxury goods is high.

There are two main drivers to the increasing demand for luxurious apartment. Generation Y and baby boomers who are empty-nesters are moving into cities such as Boston, Austin & Denver with a keen interest in luxurious finishes and amenities-packed structures. This growth is due to the fact that empty nesters and households with double incomes prefer renting rather than buy. Perks such as high-end gyms, concierge services, and full-service pet spas are becoming the standard. It seems like there is an inordinate number of amenities offered with each new building. Developers are actively incorporating these types of modern perks in their developments, however they're not at a cost.

The cost of construction can be expensive.

The main reason that the majority of new developments that are on the market are expensive. This is due to the increasing cost of construction work. The demand for construction work is at an all-time high, as is the price of building materials is at their highest ever been. As 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 low-cost construction. It costs the same." As a result of high cost of labor and materials, and the rise in the value of natural resources developers are obliged to build luxurious products since the numbers don't work to build any other kind of building. To make sure that affordable housing is available cities are enforcing rules that require developers to include affordable units within their construction plans. The average unit count and the location determines how the developers will be able to charge. The regulations won't cause an increase in affordable housing.

What alternatives are there for affordable housing? Visit.

Through the years, there have been several building boom and bust cycles. There are many apartments built between 1970 and 90 in various areas across the country. While these properties may feel old-fashioned when compared to the buildings that are being built in the present, they're "bones" are good. The buildings built in the frame have been constructed with modern techniques and materials. They typically only need surface rehabbing with wear items replaced. These communities and their secondary markets are well placed to offset the flood of luxury apartments. They also provide affordable housing. The Class B homes are able to thrive in any economic environment. If the economy is flourishing Class C tenants are able to move up into Class B properties . When the economy is struggling the Class A tenants will not afford the high rents and are typically forced to move to class B properties. Investors can typically purchase these properties for a fraction of the cost to build, which allows them to provide a comfortable home, but keep the rents affordable to tenants with varying income ranges.
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