CNBC released a report last week stating that the multifamily realty sector is facing an "acute crisis". The article concludes that the upper end of the luxury market is over-built and prone to a flattening or a market correction. Apartment developers in the 150 largest US towns built 395 775 housing units last fiscal year. This is an increase of 46% compared to previous years. About 75-80% of these new homes are in high-end communities. ,Going here.

I've witnessed many large developments being built at a rapid pace while living in Boston for the past few years. The majority of these properties are luxurious luxury residences that most people cannot afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article pointed out the absence of affordable housing and an abundance of luxury houses that do not meet the needs of the diverse population within the city.

With the arrival of all of these new luxurious multifamily homes is this putting the entire multifamily market at risk of flattening or even a collapse? The threat to Class A new construction is obvious if the market flattens, however; existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances as well as corrections. Let's examine the reasons behind why there's been an unprecedented growth in the luxury market and what happens in the event that demand declines.

The demand for luxury goods is high.

There are a few major factors driving the increasing demand for luxury homes. Baby boomers and empty nesters are moving into cities like Boston, Austin & Denver with a keen interest in luxury finishes and luxurious properties. One of the main reasons to this increase is that many double income households of millennials and empty nesters who can afford to buy are choosing to rent. Facilities like top-of-the-line fitness centers, 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. Modern facilities are being integrated into the projects of developers at a rapid pace and aren't cheap.

The cost of construction can be expensive.

The primary reason for the majority of new housing complexes you see being put up for sale is expensive is because of the ever-rising price of construction materials and labor. The demand for construction labor is at an all-time high and the price of building materials is at the highest they've ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury structure or in a low-cost building. It's the same price. It's the same." To make sure that affordable housing is available, cities are enforcing regulations that require developers to incorporate affordable units in their new construction projects. The average number of units as well as the location will determine how much they charge. These regulations will not result in an increase in the number of affordable homes.

If Affordable Housing Can't Be Built, What is the Alternative? Home page.

There have been many boom and bust cycles in the construction industry over the years. You will find many apartments built between 1970 and 1990 in various cities across the nation. Although these properties might seem out-of-date compared to the current construction but the "bonesare still in good condition. These buildings constructed in the frame were constructed using contemporary materials and techniques, and typically only need surface rehabbing with the replacement of wear and tear items. These communities, as well as the secondary markets that they're in are strategically placed to counterbalance the flood of luxury homes being built and to maintain housing that's fairly affordable. The great thing about these Class B homes is that they typically are able to perform well in all economic climates. If the economy is robust, Class C tenants are able to move into Class B homes. When the economy is in decline tenants of Class A have to shift to more affordable Class B properties. These homes are usually offered for less than the cost of building. This allows investors to offer a great place to call home and yet still pay attractive rents that tenants of different incomes are able to afford.
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