CNBC released a report last week stating that the multifamily realty market is in the midst of an "acute crisis". According to the report, the luxury market's upper end is crowded and prone to market corrections or flattening. Developers of apartments in the top 150 US towns constructed 395 775 housing units last financial year. This represents an increase of 46% compared to the previous year. Of the new housing units, nearly 75-80% are considered luxury communities. ,Website.

I've witnessed many large development projects being constructed at an incredible pace while living in Boston for the past few years. As a result, the overwhelming majority of these are high-end luxury apartments which the average citizen cannot afford. In reality, the Spotlight Team at the Boston Globe recently released a set of articles that focused on creation of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing, as well as the overabundance luxury housing that don't meet the needs of the diverse population of the city.

With the arrival of all these new luxury multifamily properties, does this put the entire multifamily industry at risk of a flattening or collapse? The threat to Class A new construction is apparent if the market flattens, however; existing Class B & C multifamily communities are uniquely placed to withstand market imbalances and corrections. Let's look at the reasons for this boom in luxury, and what will happen if it ends.

Luxury demand is strong

There are two main reasons of the growing demand for luxurious apartment. Millennials and empty-nester baby boomers are descending on city centers like Boston, Austin & Denver with a desire for luxury finishes and luxurious buildings. One reason to this increase is that a lot of double-income millennial households and empty nesters that can afford to buy are opting to rent. Benefits like high-end gyms, concierge services and full-service pet spas are now the norm. Every time a new construction is completed there is a sense that there is an amenities arms race. Developers are aggressively incorporating these types of modern perks into their plans, but, it doesn't come cheap.

Construction costs are high for new construction.

High-end housing is the primary reason why the majority of new developments you see on the market are high-end. This is due to the increasing cost of construction work. Construction labor demand is at an all-time high, as is the cost of materials is at the highest they've ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury building or in a low-cost structure. It's priced the same." It costs the same." Cities are being forced to adopt laws that force developers to build an amount of affordable homes within their construction projects. Most often, between 10% and 20% based on the unit count and location. But, on their own, these rules won't result in a significant growth in affordable housing.

What alternatives are there to affordable housing? Read this.

There have been numerous cycles of boom and bust in the building industry over the years. There are many apartments built between 1970 and 90 in various cities across the United States. Although these homes may appear very out of date compared to what's being built today but the "bones" are in good shape. Buildings built during this time frame have been constructed with modern techniques and materials. They typically require only surface renovations and wear-related items replaced. These communities and the secondary markets they serve are well-positioned to counter the influx of luxurious homes. They also offer affordable housing. The Class B homes are able to thrive in any economic environment. If the economy is robust Class C tenants can shift to Class B properties. If the economy is weak tenants of Class A are forced to move down to more affordable Class B homes. They are typically accessible for less than cost of building. This allows investors to offer an ideal location to live in while still offering appealing rents that tenants of different income levels can afford.
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