The week before, CNBC published an article which suggested that "There is an acute crisis coming our way" in the multifamily real estate sector. According to the article, the market's luxury end is crowded and prone to market corrections or flattening. In reality, apartment builders in the top 150 US cities built 395,775 new housing units in the last year, which represents an increase of 46% Y-o-Y. Nearly 75-80% of these new housing units are luxurious communities. ,Visit.

In my time in Boston over the past few years, I've witnessed many major developments being built at an incredibly rapid pace. The majority of these properties are luxurious luxury residences which the majority of people can't afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing, as well as the excess of luxury housing that don't meet the needs of the diverse population of the city.

With the emergence of all these multi-family luxury properties, does this put the entire multifamily market at risk of flattening or even a collapse? The danger to Class A new construction is evident if the market is flat, however; the existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances and corrections. Let's take a look at the motives of this luxury boom and what will happen if it ends.

Demand for luxury is on the rise

There are two main drivers of the growing demand for luxurious homes. Generation Y and empty nester baby boomers are making their way to cities such as Boston Austin, Boston, and Denver. They have a keen taste for luxurious finishes and amenities-packed properties. The rise in popularity can be attributed to the reality that empty-nesters and households with double incomes prefer renting rather than purchase. Facilities like top-of-the-line fitness centers, concierge services, and full-service pet spas are now the norm. With each new building there is a sense that there's an arms race. Developers are aggressively incorporating these modern perks into their plans, but, it doesn't come inexpensively.

The cost of construction can be expensive.

Luxury housing is the main reason that the majority of new developments you see on the market are expensive. This is due to the growing cost of construction work. Construction labor is in high demand and materials are priced at their most expensive ever. According to 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 structure. It's exactly the same price. Because of the high cost of labor and materials, and the rising value of the natural resources developers are obliged to build luxurious products since the numbers don't allow for building anything else. To provide affordable housing, cities are enforcing regulations that require developers to incorporate affordable units in their new construction projects. The average unit count and the location will determine how the developers will be able to charge. But, on their own, these rules do not guarantee a significant growth in affordable housing.

If Affordable Housing isn't Built, What is the Alternative? Learn more.

There have been numerous cycles of boom and bust within the construction industry over the decades. In numerous markets across the country, you will find a large number of apartments constructed between the 1970's and 1990's. While they may seem outdated compared to current construction, the "bonesare still in good condition. Buildings built during this time frame were built with modern materials and techniques and generally only require surface rehabilitation with wear items replaced. These apartment communities, and the secondary markets they're located in, are positioned well to counterbalance the flood of luxury homes being built and provide housing that's relatively affordable. These Class B properties can perform in any economic climate. When the economy is thriving Class C tenants are able to are able to move into Class B homes. If the economy is struggling and Class A tenants are unable to find it difficult to justify the extravagant rents and are typically forced to move to Class B properties. Investors can typically purchase these properties at a fraction of the cost to build and can thus offer a wonderful home, but maintain rents at a level attractive for tenants with different income levels.
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