The week before, CNBC published an article suggesting that "There is a crisis of extreme proportions that is coming our way" within the multifamily real estate industry. According to the article the market's luxury end is overcrowded and susceptible to market fluctuations or flattening. In actuality, apartment developers in the largest 150 US cities delivered 395,775 new housing units in the last year, which marks a 46% increase Y-o-Y. The majority of the new units of housing are high-end communities. ,Homepage.

I've seen many major developments built at breakneck speed while living in Boston over the last few years. As a result, the overwhelming majority of these homes are luxury homes that the average person are unable to afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing as well as the inordinate supply of luxury homes that doesn't cater to the diverse population of the city.

With the arrival of all these new luxurious multifamily homes, does this put the entire multifamily industry at risk of a collapse or flattening? The risk to Class A new construction is apparent if the market flattens but existing Class B & C multifamily communities are uniquely placed to withstand market imbalances as well as corrections. Let's look at the reasons for this luxury boom, and what happens if it is over.

The Demand for Luxury is High

There are two major factors driving the rising demand for luxury apartments. Millennials and empty-nester baby boomers are descending on city centers such as Boston, Austin & Denver with a desire for luxurious finishes and amenities-packed structures. This growth is due to the trend that empty nesters and families with double incomes in the millennial generation are opting to rent instead to purchase. Luxury gyms, concierge service and spas with full-services for pets are all becoming regular. With each new building it appears that there's an arms race. Developers are actively incorporating modern amenities into their plans, but they're not inexpensively.

New construction is expensive.

The reason the overwhelming majority of new homes being put up for sale is expensive is because of the increasing price of construction labor and building materials. Construction labor demand is at an all-time high, and the cost of building materials is the most they have ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxurious building or in an affordable structure. It's the same price." It costs the same." To make sure that affordable housing is available cities are enforcing rules which require developers to build affordable units in construction plans. Most often, between 10% and 20% based on the unit count and location. However, these regulations alone won't result in a significant growth in affordable housing.

What alternatives are there to housing that is affordable? Home page.

There have been numerous boom and bust cycles in the building industry throughout the decades. In numerous markets across the country, you will see a lot of apartments constructed between the 1970's-1990's. While they may seem outdated compared to current construction however, the "bonesremain in good shape. The buildings built during this time were constructed using modern techniques and materials. They typically need only surface repairs and wear items can be replaced. These communities as well as their secondary markets are well-positioned to offset the flood of luxurious apartment buildings. They also offer affordable housing. The Class B homes are able to succeed in any economic situation. When the economy is thriving Class C tenants are able to are able to move into Class B homes. If the economy is suffering, Class A tenants can not afford the high rents and typically move down to more affordable Class B properties. They are typically offered for less than the cost of building. This allows investors to offer a great property to live in while still offering appealing rents that tenants of different income levels are able to afford.
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