CNBC issued a report this week that said that the multifamily real estate sector is facing an "acute crisis". The article concludes that the top end of the market for luxury is overbuilt and vulnerable to a flattening or a market correction. In fact, apartment developers in the 150 largest US cities delivered 395,775 new housing units last year, which marks an increase of 46% Y-o-Y. Nearly 75-80% of these new homes are in high-end communities. ,Discover more.

I've seen many major developments built at breakneck speed when I lived in Boston for the past few years. Most of these homes are expensive luxury apartments that most people cannot 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 excess of luxury housing that doesn't cater to the diverse population of the city.

Do these multifamily developments pose danger to the multifamily market? If the market flattens and the risk of collapse increases, it is of a collapse for Class A new construction. However existing Class B & C multifamily communities can withstand market corrections and imbalances. Let's look at the reasons of this luxury boom and what will happen if it comes to an end.

Luxury Demand is Strong

There are two major reasons for the rising demand for luxurious homes. Millennials and empty nester baby boomers are moving to cities like Boston, Austin, and Denver. They have a keen taste for high-end finishes and luxurious properties. One specific reason for this growth is that lots of double-income households, as well as empty nesters that can afford to buy are opting to rent. Benefits like high-end fitness centers, concierge services, and full-service pet spas are becoming standard. There's an inordinate quantity of amenities available in every new building. Developers are actively incorporating these modern perks into their projects; however they're not inexpensively.

New Construction is Cost Prohibitive

The main reason for the fact that most developments on the market are expensive. This is due to the increasing cost of construction labor. The demand for construction labor is at an all-time high, as is the cost of materials is at their highest ever been. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or low-cost ones." It costs the same." It's the identical." To make sure that affordable housing is available cities are now enforcing laws which require developers to build affordable units in new construction projects. Most often, between 10% and 20% based on the number of units and location. However, these regulations alone do not guarantee a significant increase in the amount of affordable housing.

If Affordable Housing Can't Be Built, what is the Alternative? More info.

There have been numerous cycles of boom and bust in the building industry throughout the decades. There are many apartment buildings constructed between 1970 and 1990 in various areas across the United States. Although these homes may appear old-fashioned in comparison to the modern buildings being constructed today, the "bones" are in good shape. The buildings built during this time were constructed with modern materials and techniques. They generally need only surface repairs and wear items can be replaced. These communities, as well as their secondary markets are well placed to counter the influx of luxury apartment buildings. They also offer affordable housing. These Class B properties are able to succeed in any economic situation. If the economy is flourishing, Class C tenants shift to Class B properties . When the economy is struggling the Class A tenants will no longer justify the luxury rents and are typically forced to move to more affordable class B properties. They are typically offered for less than the cost of building. This allows investors to offer an ideal location to live in and still maintain attractive rents that tenants of different incomes can afford.
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