In the last week, CNBC published an article suggesting that "There is a crisis of extreme proportions headed our way" in the multifamily real estate sector. According to the report, the luxury market's upper end is overcrowded and susceptible to market declines or flattening. Developers of apartments in the largest 150 US towns built 395 775 new housing units last fiscal year. This represents an increase of 46% compared to the previous year. Of the new units of housing, about 75-80% are considered luxury communities. ,Learn more.

When I lived in Boston over the past few years, I've witnessed numerous major developments being constructed at a breakneck speed. Not surprisingly, the overwhelming majority of these homes are high-end luxury apartments that your average citizens cannot afford. In reality there is a reason why the Spotlight Team at the Boston Globe recently published a number of pieces that focused on the creation of the "Seaport" neighborhood. The article highlighted its lack of affordable housing and an abundance of luxury houses that does not cater to the diverse population within the city.

With the arrival of all these luxurious multifamily homes, does this put the entire multifamily industry at risk of a flattening or collapse? If the market slows down it could be a problem of a collapse for Class A new construction. However, the existing Class B & C multifamily communities can withstand market volatility and market imbalances. Let's look at the reasons for this boom in luxury, and what will happen if it ends.

Luxury demand is strong

There are two main reasons of the growing demand for luxurious apartments. Millennials and empty-nester baby boomers are flocking to city centers like Boston, Austin & Denver with a keen interest in luxury finishes and luxurious buildings. One of the main reasons to this increase is that lots of double-income households of millennials and empty nesters that can afford to purchase are choosing to rent. Luxury gyms, concierge service and full-service spas for pets are all becoming regular. With every new development, it seems as though there is an amenities arms race. Developers are actively incorporating these types of modern perks into their projects; however they're not cheap.

New construction is expensive

The main reason why the majority of new residential developments being put up for sale is expensive is because of the ever-rising costs of construction labor and building materials. Construction labor is in high demand and the materials are at their highest price ever. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury structures or in affordable ones." It's exactly the same price. Because of the high prices for labor and materials as well as the rise in the value of natural resources developers are obliged to build luxurious products due to the fact that the numbers do not make sense to construct any other type of construction. To ensure affordable housing cities are enforcing rules that require developers to include affordable units within their new construction projects. The typical range is between 10 and 20%, based on unit count and the location. The regulations won't result in an increase in the number of affordable homes.

If Affordable Housing Isn't Built, What is the alternative? Learn more.

Through the years, there have been several building boom and bust cycles. There are many apartments constructed between 1970 and 1990 in various areas across the United States. Although these homes may appear old-fashioned in comparison to the modern buildings being constructed nowadays however, they're "bones" are quite good. These buildings constructed in the frame were constructed using contemporary materials and techniques, and generally only require surface rehabilitation and wear-related items replaced. These communities as well as the secondary markets they serve are well-positioned to counteract the overflow of luxury homes. They also provide affordable housing. The Class B homes can thrive in any economic environment. When the economy is strong, Class C tenants move into Class B properties. When the economy is struggling tenants of Class A have to shift to more affordable Class B properties. These properties are often accessible for less than price of construction. This allows investors to offer a great property to live in and yet still pay attractive rents that tenants of different income levels can afford.
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