The week before, CNBC published an article in which they claimed that "There is an urgent crisis coming towards us" within the multifamily real estate market. According to the article, the luxury market's upper end is too crowded and vulnerable to market declines or flattening. Apartment developers in the 150 largest US towns built 395 775 new housing units in the last financial year. This represents an increase of 46% compared to previous years. Of the new units of housing, about 75-80% are considered luxury communities. ,Homepage.

When I lived in Boston over the past few years, I've seen many major developments being built in a rapid manner. As a result, the overwhelming majority of these properties are luxury homes which the average citizen can't afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing as well as the excess of luxury housing that doesn't cater to the diverse population of the city.

With the advent of all these luxurious multifamily homes could this put the entire multifamily industry at risk of a flattening or even a collapse? The danger of Class A new construction is obvious if the market flattens but existing Class B & C multifamily communities are well-positioned to stand up to market imbalances and corrections. Let's examine the causes for this boom in luxury, and what will happen if it comes to an end.

The demand for luxury goods is high.

There are a few key drivers behind the demand for luxury apartments. Millennials and empty nester baby boomers are moving into cities like Boston and Austin as well as Denver. They have a keen taste for luxurious finishes and amenities-packed properties. One reason to this increase is that a lot of double-income households, as well as empty nesters who can afford to purchase are choosing to rent. High-end gyms, concierge services and full-service spas for pets are becoming more commonplace. It seems like there is an appalling amount of amenities being offered with each new building. These types of modern amenities are being included in the projects of developers rapidly however, it's not cheap.

New Construction is costly.

The main reason why the vast majority of the new homes that are on the market is luxury is due to the rising price of construction labor and materials. The demand for construction work is at an all-time high and the price of building materials is at the highest they've ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury building or in a budget-friendly construction. It's the same price." Due to the high cost of 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 anything else. Cities are having to enact rules that require developers to build an amount of affordable units in their new construction projects. The typical range is between 10 and 20%, based on unit count and the location. The regulations won't cause an increase in the number of affordable homes.

If Affordable Housing isn't Constructed, What's the Alternative? Click this link.

There have been numerous boom and bust cycles in the construction industry over the years. You will find many apartments built between 1970 and 90 in various markets across the nation. While these homes may appear out-of-date compared to the current construction but the "bonesare still in good condition. The buildings built in the frame were constructed using modern techniques and materials. They generally only require surface rehabilitation with wear items replaced. These communities and their secondary markets are well placed to offset the flood of luxurious apartment buildings. They also offer affordable housing. The Class B homes are able to perform in any economic climate. When the economy is strong Class C tenants are able to are able to move into Class B homes. When the economy is weak tenants of Class A are forced to move down to Class B homes. Investors can typically purchase these properties at only a small portion of the price of construction they can offer a wonderful home, but maintain rents in a range that is appealing to tenants with varying income ranges.
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