In the last week, CNBC published an article which suggested that "There is an urgent crisis headed our way" within the multifamily real estate market. The article suggests that the upper end of the market for luxury is overbuilt and susceptible to flattening or a market correction. In reality, apartment builders in the top 150 US cities delivered 395,775 new housing units last year, which represents a 46% increase Y-o-Y. Of these new units of housing, about 75-80% are classified as luxury communities. ,Home page.

While living in Boston in the last few years, I've witnessed several major developments being constructed in a rapid manner. Not surprisingly, the overwhelming majority of these are luxurious luxury residences that your average citizens can't afford. In actuality it was the Spotlight Team at the Boston Globe recently published a number of pieces that focused on the creation of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing, as well as the overabundance luxury housing that doesn't cater to its diverse population.

Do these multifamily developments pose danger to the multifamily sector? The risk to Class A new construction is apparent if the market flattens but existing Class B & C multifamily communities are uniquely placed to stand up to market imbalances and corrections. Let's look at the reasons for this luxury boom, and what happens if the boom comes to an end.

The demand for luxury goods is strong

There are two main reasons for the rising demand for luxurious apartments. Generation Y and empty nester baby boomers are moving to cities like Boston and Austin as well as Denver, with a taste for luxurious finishes and amenities-packed structures. One specific reason to this increase is that lots of double-income households of millennials and empty nesters who can afford to buy are choosing to rent. Luxury gyms, concierge service and full-service spas for pet owners are all becoming the norm. There is an inordinate number of amenities offered with each new building. These kinds of modern facilities are being integrated into development projects at a rapid pace, but it isn't cheap.

New construction is expensive.

The primary reason for the vast majority of the new homes that are on the market is luxurious is because of the ever-rising price of construction labor and building materials. Construction is a high-demand industry and the materials are 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 structure or in a low-cost construction. It's priced the same." As a result of high cost of labor and materials, and the rising value of the natural resources, developers are forced to build luxury products due to the fact that the numbers do not allow for building anything else. To make sure that affordable housing is available, cities are enforcing regulations that require developers to incorporate affordable units within their new construction projects. The average unit count and the location will determine how the developers will be able to charge. These regulations will not cause an increase in housing for the poor.

If Affordable Housing Isn't Built, what is the Alternative? Find out more.

Throughout the decades there have been building booms and busts. There are many apartment buildings built between 1970 and 90 in various areas across the United States. While these properties may feel outdated in comparison to the modern buildings being constructed nowadays but they're "bones" are quite good. The buildings built during this time were built using the most modern materials and techniques. They typically just require minor repairs, and wear items can be repaired. These communities as well as their secondary markets are well-positioned to offset the flood of luxurious apartment buildings. They also offer affordable housing. These Class B properties can thrive in any economic environment. If the economy is robust, Class C tenants shift to Class B properties. When the economy is struggling, tenants of Class A are forced to move down to Class B properties. Investors can usually buy these homes for only a small portion of the price of construction they can provide a comfortable living space, yet keep the rents in a range that is appealing for tenants with different income levels.
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