CNBC released a report last week stating that the multifamily real estate sector is experiencing an "acute crisis". The article surmises that the top end of the market for luxury is over-built and prone to flattening or a market correction. Developers of apartments in the largest 150 US towns constructed 395 775 housing units last fiscal year. This is an increase of 46% compared to the previous year. About 75-80% of these new homes are in luxurious communities. ,Website.

I've seen many major development projects being constructed at an incredible pace while living in Boston over the last few years. A majority of these developments are expensive luxury apartments that most people cannot 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 shortage of affordable housing and the excess of luxury housing that doesn't cater to its diverse population.

Are these multifamily developments an imminent threat to the multifamily industry? If the market is flat it could be a problem of a collapse for Class A new construction. However, the existing Class B & C multifamily communities are able to withstand market corrections and imbalances. Let's take a look at the motives for this boom in luxury, and what happens if it ends.

Demand for luxury is on the rise

There are two main reasons for the rising demand for luxurious apartments. Generation Y and baby boomers who are empty-nesters are moving into cities such as Boston, Austin & Denver with a keen interest in luxury finishes and luxurious properties. One reason for this growth is that a lot of double-income millennial households and empty nesters that can afford to purchase are choosing to rent. Perks such as high-end fitness centers, concierge services, and full-service pet spas are now the norm. With every new development it appears that there is an amenities arms race. Developers are rushing to incorporate these modern perks into their projects; however it's not at a cost.

New Construction is costly.

High-end housing is the primary reason for the fact that most new developments you see in the marketplace are of high-end quality. This is because of the increasing cost of construction labor. Construction is a high-demand industry and materials are priced at their highest price ever. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury structure or in a budget-friendly structure. It's priced the same." It costs the same." Cities are being forced to adopt regulations to force developers to construct an amount of affordable units in their new construction projects. Typically between 10%-20% depending on the unit count and the location. But these rules alone won't result in a significant increase in the number of affordable housing.

What alternatives are there to affordable housing? Get more info.

Through the years, there have been several building boom and bust cycles. In many markets around the country, you'll find a large number of apartments constructed between the 1970's and 1990's. Although these homes may appear very out of date in comparison to the modern buildings being constructed nowadays, they're "bones" are in good shape. These buildings constructed in the frame were built with modern materials and techniques and generally only require surface rehabilitation with wear items replaced. These communities and the secondary markets they serve are well-positioned to counteract the overflow of luxurious homes. They also provide affordable housing. The Class B homes can perform in any economic climate. When the economy is strong Class C tenants can are able to move into Class B properties When the economy is struggling the Class A tenants will no longer justify the luxury rents and typically move down to more affordable Class B properties. These properties are often available for less than the price of construction. This allows investors to offer the perfect location to live in and yet still pay attractive rents that tenants with different incomes can afford.
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