This past week, CNBC published an article in which they claimed that "There is a crisis of extreme proportions coming our way" within the multifamily real estate industry. The article suggests that the upper tier of the market for luxury is overbuilt and vulnerable to a flattening or a market correction. In fact, apartment developers in the 150 largest US cities delivered 395,775 new housing units last year, which is an increase of 46% Y-o-Y. Nearly 75-80% of these new housing units are luxurious communities. ,Find out more.

When I lived in Boston in the last few years, I've witnessed several major developments being constructed in a rapid manner. Most of these homes are luxury homes that most people cannot afford. In reality, the Spotlight Team at the Boston Globe recently published a series of articles that focused on development of the new "Seaport" neighborhood. It highlighted the city's lack of affordable housing as well as the excess of luxury housing which doesn't accommodate the diverse population of the city.

Do these multifamily developments pose danger to the multifamily sector? The threat of Class A new construction is evident if the market is flat but the existing Class B & C multifamily communities are well-positioned to withstand market imbalances and corrections. Let's go through the reasons behind why there's been an unprecedented growth in the luxury market and what happens if demand subsides.

The demand for luxury goods is high.

There are two important factors that drive the demand for luxury apartments. Generation Y and baby boomers who are empty-nesters are descending on city centers such as Boston, Austin & Denver with a keen interest in high-end finishes and amenity-packed structures. One reason for this boom is that lots of double-income millennial households and empty nesters who can afford to buy are choosing to rent. Perks such as high-end fitness centers, concierge services and fully-service pet spas are becoming standard. There's an astonishing number of amenities offered with each new building. Developers are aggressively incorporating these types of modern perks into their projects; however they're not inexpensively.

New Construction is Cost Prohibitive

The main reason for the fact that most new developments that are on the market are high-end. This is because of the growing cost of construction work. Construction labor is in high demand and the materials are at their highest ever price. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury building or in a low-cost building. It costs the same." It costs the identical." To provide affordable housing, cities are enforcing regulations that require developers to include affordable units in new construction projects. The typical range is between 10 and 20%, based on the number of units and the location. This will not result in an increase in the number of affordable homes.

What are the alternatives to housing that is affordable? Web site.

Over the past few decades, there has been building booms and busts. You will find many apartments constructed between 1970 and 1990 in various cities across the United States. While these properties may feel outdated in comparison to the modern buildings being constructed in the present, they're "bones" are good. The buildings built during this time were built using the most modern materials and techniques. They generally need only surface repairs and wear items can be repaired. These apartment communities, and the secondary markets they're located in are well-positioned to counterbalance the influx of luxury homes being built and provide housing that's relatively affordable. These Class B properties can succeed in any economic situation. If the economy is robust, Class C tenants shift to Class B properties. When the economy is struggling, tenants of Class A have to shift to Class B properties. These homes are usually accessible for less than cost of building. This allows investors to offer the perfect place to call home while still offering attractive rents that tenants of different income levels can afford.
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