CNBC issued a report this week that stated that the multifamily realty sector is facing an "acute crisis". The article suggests that the top end of the market for luxury is over-built and prone to a flattening or a market correction. In actuality, apartment developers in the largest 150 US cities constructed 395,775 brand new housing units last year, which is an increase of 46% year-over-year. Of the new units of housing, about 75-80% are considered to be luxury communities. ,Learn more here.

I've seen many major developments built at breakneck speed while living in Boston in recent years. Most of these homes are luxury homes which the majority of people can't afford. In fact there is a reason why the Spotlight Team at the Boston Globe recently published a number of articles that focused on creation of the "Seaport" neighborhood. The article highlighted the lack of affordable housing and the overabundance of luxury homes which does not serve the diverse population of the city.

Are these multifamily developments an imminent threat to the multifamily market? If the market flattens, there is a risk of a collapse for Class A new construction. However, the existing Class B & C multifamily communities can stand up to market volatility and market imbalances. Let's examine the reasons for such an unprecedented growth in the luxury market and what could happen when demand slows.

Demand for luxury is on the rise

There are two major reasons to the increasing demand for luxurious homes. Generation Y and baby boomers who are empty-nesters are moving into cities such as Boston, Austin & Denver with a desire for luxury finishes and luxurious properties. This boom can be attributed to the reality that empty-nesters and double-income millennial households are opting to rent instead than buy. Perks such as high-end gyms, concierge services, and pet spas that are full-service are becoming the standard. With each new building it appears that there's an arms race. Developers are aggressively incorporating these types of modern perks into their plans, but they're not cheap.

Construction costs are high for new construction.

Luxury housing is the main reason that the majority of developments on the market are expensive. This is due to the growing cost of construction work. Construction is a high-demand industry and materials are priced at their highest ever price. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious buildings or affordable buildings." It costs the same." It's the same." Cities are being forced to adopt regulations to force developers to create the right amount of affordable units in their construction projects. Typically between 10%-20% depending on the unit count and the location. These regulations will not lead to an increase in affordable housing.

If Affordable Housing Isn't Built, What is the Alternative? Click this link.

There have been many boom and bust cycles within the building industry over the decades. There are many apartment buildings constructed between 1970 and 1990 in various markets across the country. While these properties may feel old-fashioned compared to what's being built nowadays however, they're "bones" are quite good. These buildings constructed in the frame were built with modern techniques and materials. They typically require only surface renovations with the replacement of wear and tear items. These apartment communities, and the secondary markets they're in are strategically placed to counterbalance the flood of new luxury apartments and to maintain housing that's fairly affordable. The Class B homes can perform in any economic climate. When the economy is strong Class C tenants are able to shift to Class B properties. If the economy is struggling Class A tenants are forced to relocate to more affordable Class B homes. Investors are able to purchase these properties at less than the cost to build they can provide a comfortable home, but ensure that rents remain in a range that is appealing to tenants of many income levels.
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