CNBC released a report last week that said that the multifamily realty market is facing an "acute crisis". According to the article the upper-end of the luxury market is overcrowded and susceptible to market fluctuations or flattening. Developers of apartments in the top 150 US towns built 395 775 new housing units in the last fiscal year. This is an increase of 46% over previous years. Nearly 75-80% of these new homes are in high-end communities. ,Click here.

When I lived in Boston over the past few years, I've witnessed many major developments being built at a breakneck speed. A majority of these developments are luxury homes that most people cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. The article highlighted its lack of affordable housing and the overabundance of luxury homes that does not cater to the diverse population in the city.

With the emergence of all of these new luxury multifamily properties is this putting the entire multifamily market at risk of a flattening or even a collapse? The danger to Class A new construction is apparent if the market flattens, however; existing Class B & C multifamily communities are uniquely positioned to stand up to market imbalances and corrections. Let's go through the reasons for such a luxury boom and what happens when demand slows.

The demand for luxury goods is high.

There are a few important factors that drive the increasing demand for luxury homes. Generation Y and empty nester baby boomers are moving into cities such as Boston and Austin as well as Denver, with a taste for luxurious finishes and amenities-packed structures. This growth is due to the fact that empty nesters and households with double incomes prefer renting rather to purchase. The latest gyms, concierge services and full-service spas for pets are now the norm. Every time a new construction is completed it appears that there's an arms race. Developers are aggressively incorporating modern amenities into their plans, but they're not cheap.

New construction is expensive.

Luxury housing is the main reason for the fact that most new developments that are on the market are expensive. This is because of the rising costs of construction labor. Construction is a high-demand industry and materials are priced at their most expensive ever. According to 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 budget-friendly building. It's exactly the same price. It's the same." Cities are forced to pass regulations to force developers to build the right amount of affordable units in their construction projects. The average unit count and the location will determine the developers will be able to charge. These regulations will not result in an increase in affordable housing.

If Affordable Housing Can't Be Built, What is the alternative? Website.

Throughout the decades there have been several building boom and bust cycles. In many areas across the country, you will notice large numbers of homes built between the 1970's and 1990's. While these homes may appear outdated compared to current construction however, the "bonesare still in good condition. Built during this period were constructed using modern materials and techniques. They usually only require surface rehabilitation and wear and tear items can be repaired. These communities, as well as their secondary markets are well placed to offset the flood of luxurious homes. They also offer affordable housing. The Class B homes can perform in any economic climate. When the economy is strong Class C tenants are able to move into Class B properties. When the economy is weak, tenants of Class A have to shift to Class B homes. Investors can usually buy these homes for less than the cost to build, which allows them to offer a wonderful place to live yet still ensure that rents remain affordable for tenants with different income levels.
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