CNBC released a report last week stating that the multifamily realty market is facing an "acute crisis". According to the report the upper-end of the luxury market is overcrowded and susceptible to market fluctuations or flattening. Developers of apartments in the largest 150 US towns built 395 775 housing units during the fiscal year. This represents an increase of 46% over previous years. Of these new units of housing, about 75-80% are classified as luxury communities. ,Read this.

When I lived in Boston in the last few years, I've seen numerous major developments being constructed at a breakneck speed. Not surprisingly, the overwhelming majority of these homes are luxury homes that the average person cannot afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article highlighted its lack of affordable housing as well as the overabundance of luxury homes which does not serve the diverse population of the city.

With the arrival of all these multi-family luxury properties is this putting the entire multifamily sector at risk of collapse or flattening? If the market is flat it could be a problem of a collapse for Class A new construction. However, existing Class B & C multifamily communities can withstand market corrections and imbalances. Let's go through the reasons behind why there's been an unprecedented growth in the luxury market and what could happen if demand subsides.

Luxury demand is strong

There are two important factors that drive the rising demand for luxury apartments. Baby boomers and empty nesters are moving into cities such as Boston, Austin & Denver with a keen interest in high-end finishes and amenity-packed structures. One specific reason to this increase is that lots of double-income millennial households and empty nesters with the money to purchase are choosing to rent. Benefits like high-end fitness centers, concierge services and full-service pet spas are becoming the standard. With every new development, it seems as though there's an arms race. Developers are actively incorporating these modern perks into their projects; however it's not at a cost.

New Construction is costly.

Luxury housing is the main reason for the fact that most new developments you see on the market are expensive. This is because of the growing cost of construction labor. Construction is a high-demand industry and materials are at their most expensive ever. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxury building or in a low-cost construction. It costs the same." Because of the high materials and labor costs and the rise in the value of natural resources, developers are required to construct luxury homes due to the fact that the numbers do not work to build any other kind of building. To provide affordable housing cities are enforcing rules which require developers to build affordable units in new construction projects. Most often, between 10% and 20% based on the number of units and the location. This will not lead to an increase in the number of affordable homes.

What alternatives are there for affordable housing? Home page.

There have been many cycles of boom and bust in the construction industry over the decades. There are many apartments built between 1970 and 1990 in various areas across the United States. Although these properties might seem old-fashioned compared to modern construction but the "bones” are still good. These buildings were constructed using modern materials and techniques. They generally need only surface repairs and wear-related items are able to be repaired. These communities, as well as the secondary markets they're in are strategically placed to counterbalance the flood of luxury new homes and maintain housing that is relatively affordable. The benefit of these Class B properties is that they tend to excel regardless of the economic conditions. If the economy is robust Class C tenants are able to move into Class B properties. When the economy is struggling Class A tenants have to shift to more affordable Class B properties. These properties are often accessible for less than cost of building. This lets investors offer the perfect location to live in and yet still pay attractive rents that tenants of different income levels can afford.
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