CNBC published a report this week stating that the multifamily realty sector is in the midst of an "acute crisis". According to the report, the upper-end of the luxury market is overcrowded and susceptible to market declines or flattening. Developers of apartments in the 150 largest US towns delivered 395 775 new housing units during the fiscal year. This is an increase of 46% over previous years. Of these new homes, around 75-80% are considered to be luxury communities. ,Learn more.

While living in Boston over the past few years, I've seen numerous major developments being constructed at a breakneck speed. The majority of these properties are luxury homes that most people cannot afford. In actuality it was the Spotlight Team at the Boston Globe recently released a set of pieces that focused on the growth of the "Seaport" neighborhood. The article pointed out the absence of affordable housing and an abundance of luxury houses that does not cater to the diverse population in the city.

With the arrival of all these new luxurious multifamily homes is this putting the entire multifamily market at risk of flattening or collapse? The risk of Class A new construction is obvious if the market flattens but the existing Class B & C multifamily communities are uniquely positioned to stand up to market imbalances and corrections. Let's look at the reasons of this luxury boom and what happens if the boom is over.

Luxury demand is strong

There are two major factors driving the increasing demand for luxury homes. Baby boomers and empty nesters are descending on city centers like Boston, Austin & Denver with a discerning taste for luxurious finishes and amenities-packed properties. One of the main reasons to this increase is that a lot of double-income millennial households and empty nesters with the money to purchase are choosing to rent. Perks such as high-end fitness centers, concierge services and full-service pet spas are becoming standard. There's an astonishing amount of amenities being offered in every new building. These kinds of modern amenities are being incorporated into developers' projects in a fast-paced manner however, it's not cheap.

New construction is expensive.

The reason the majority of new residential developments that are on the market is luxurious is because of the ever-rising cost of construction materials and labor. Construction labor is in high demand and materials are at their most expensive ever. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or affordable buildings." It's the same price. It costs the identical." To provide affordable housing cities are enforcing rules that require developers to incorporate affordable units within their construction plans. The average number of units as well as the location will determine how much they will charge. But these rules alone will not provide a meaningful increase in the number of affordable housing.

What alternatives are there to housing that is affordable? Visit.

Over the past few decades, there has been building booms and busts. In many markets around the country, you will see a lot of apartment buildings built in the 1970's and 1990's. Although they may seem old-fashioned in comparison to the modern buildings being constructed in the present but the "bones" are quite good. These buildings constructed in the frame were constructed using modern materials and techniques and generally only require surface rehabilitation with the replacement of wear and tear items. These communities, as well as the secondary markets that they're in are well-positioned to counterbalance the influx of new luxury apartments and maintain housing that is fairly affordable. The best part about Class B homes is that they typically perform well across all economic climates. When the economy is strong Class C tenants can move into Class B properties. If the economy is struggling Class A tenants are forced to move down to Class B homes. Investors can typically purchase these properties at less than the price of construction and can thus provide a comfortable place to live yet still maintain rents affordable to tenants of many income levels.
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