This past week, CNBC published an article suggesting that "There is an urgent crisis headed towards us" in the multifamily real estate sector. According to the report, the upper-end of the luxury market is too crowded and vulnerable to market declines or flattening. In reality, apartment builders in the top 150 US cities constructed 395,775 brand new housing units in the last year, which represents an increase of 46% Y-o-Y. In these new homes, around 75-80% of them are classified as luxury communities. ,Click here.

When I lived in Boston during the last couple of years, I have witnessed many major developments being built at a breakneck speed. As a result, the overwhelming majority of these are luxury homes which the average citizen can't afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article highlighted its lack of affordable housing, as well as the overabundance of luxury homes that do not meet the needs of the diverse population within the city.

With the emergence of all these new luxurious multifamily homes could this put the entire multifamily market at risk of flattening or even a collapse? The danger of Class A new construction is obvious if the market flattens but the existing Class B & C multifamily communities are uniquely placed to withstand market imbalances and corrections. Let's look at the reasons for this boom in luxury, and what will happen if it comes to an end.

The demand for luxury goods is strong

There are a few major factors driving the increasing demand for luxury homes. Baby boomers and empty nesters are descending on city centers such as Boston, Austin & Denver with a desire for high-end finishes and amenity-packed properties. This growth can be attributed to the trend that empty nesters and double-income millennial households prefer renting rather than purchase. Luxury gyms, concierge service and full-service spas for pet owners are all becoming the norm. Every time a new construction is completed there is a sense that there is an amenities arms race. Developers are aggressively incorporating these modern perks into their plans, but they're not cheap.

New construction is expensive.

The primary reason for the vast majority of the new housing complexes you see coming on the market are luxurious is because of the ever-rising cost of construction labor and materials. The demand for construction work is at an all-time high and the cost of materials is at their highest ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury building or in a budget-friendly construction. It's the same price." As a result of high materials and labor costs and the appreciation of the raw land, developers are obliged to build luxurious products due to the fact that the numbers do not make sense to construct any other kind of building. Cities are being forced to adopt regulations to force developers to build the right amount of affordable units within their construction projects. The average unit count and the location determines how the developers will be able to charge. These regulations will not cause an increase in housing for the poor.

If Affordable Housing isn't Built, what is the Alternative? Visit website.

There have been many cycles of boom and bust within the building industry throughout the years. There are many apartment buildings built between 1970 and 90 in various cities across the nation. Although these homes may appear outdated compared to what's being built nowadays, they're "bones" are in good shape. These buildings constructed in the frame have been constructed with modern materials and techniques and typically only need surface rehabbing with the replacement of wear and tear items. These apartment communities, and the secondary markets that they're in, are positioned well to counterbalance the flood of luxury new homes and maintain housing that is reasonably affordable. The great thing about these Class B homes is that they generally excel in all economic climates. If the economy is robust, Class C tenants move into Class B properties. If the economy is weak, Class A tenants have to shift to Class B homes. These properties are often available for less than the cost of building. This allows investors to offer a great location to live in and still maintain appealing rents that tenants of different incomes are able to afford.
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