The week before, CNBC published an article suggesting that "There is an acute crisis that is coming towards us" within the multifamily real estate industry. The article surmises that the upper end of the market for luxury is over-built and prone to 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 marks an increase of 46% Y-o-Y. In these new housing units, nearly 75-80% of them are classified as luxury communities. ,Website.

When I lived in Boston in the last few years, I've witnessed many major developments being built in a rapid manner. As a result, the overwhelming majority of these are luxury homes that your average citizens cannot afford. In fact, the Spotlight Team at the Boston Globe recently released a set of articles that focused on creation of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing and the overabundance luxury housing which doesn't accommodate the diverse population of the city.

With the advent of all these new luxury multifamily properties is this putting the entire multifamily market at risk of a flattening or even a collapse? If the market flattens and the risk of collapse increases, it is of a collapse for Class A new construction. However, the existing Class B & C multifamily communities are able to withstand market corrections and imbalances. Let's look at the reasons the reasons for such an increase in luxury and what happens when demand slows.

The Demand for Luxury is High

There are two key drivers behind the rising demand for luxury apartments. Baby boomers are moving into cities such as Boston Austin, Boston, and Denver, with a taste for luxury finishes and amenities-packed buildings. This growth is due to the fact that empty nesters and households with double incomes prefer renting rather than purchase. Luxury gyms, concierge service and spas with full-services for pets are becoming more regular. With each new building, it seems as though there's an arms race. Developers are rushing to incorporate modern amenities in their developments, however, it doesn't come inexpensively.

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 rising cost of construction labor. The demand for construction labor is at an all-time high and the cost of building materials is the most they have ever been. According to 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 budget-friendly building. It's the same price. It costs the identical." To make sure that affordable housing is available cities are now enforcing laws that require developers to incorporate affordable units within their new construction projects. Most often, between 10% and 20% based on the number of units and the location. The regulations won't lead to an increase in housing for the poor.

What are the alternatives to housing that is affordable? Read this.

Over the past few decades, there has been building boom and bust cycles. In many areas across the country, you'll find a large number of apartments constructed between the 1970's and the 1990's. While these homes may appear old-fashioned compared to modern construction however, the "bonesare still in good condition. These buildings constructed in the frame were built with modern techniques and materials. They typically require only surface renovations with wear items replaced. These communities, as well as their secondary markets are well-positioned to counter the influx of luxury apartment buildings. They also provide affordable housing. The Class B homes can succeed in any economic situation. If the economy is robust Class C tenants are able to shift to Class B properties. If the economy is struggling Class A tenants are forced to move down to more affordable Class B homes. Investors can usually purchase these properties at less than the price of construction, which allows them to provide a great living space, yet keep the rents affordable to tenants with varying income levels.
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