CNBC released a report last week stating that the multifamily real estate sector is experiencing an "acute crisis". According to the report the luxury market's upper end is overcrowded and susceptible to market fluctuations or flattening. In reality, apartment builders in the largest 150 US cities constructed 395,775 brand new housing units in the last year, which is an increase of 46% year-over-year. Of the new housing units, nearly 75-80% are classified as luxury communities. ,Visit this link.

I've seen a lot of major developments built at breakneck speed during my time in Boston in recent years. Not surprisingly, the overwhelming majority of these are high-end luxury apartments which the average citizen can't afford. In actuality there is a reason why the Spotlight Team at the Boston Globe recently released a set of articles that focused on growth of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing as well as the overabundance luxury housing that doesn't cater to the diverse population of the city.

Do these multifamily developments pose a threat to the multifamily industry? If the market flattens, there is a risk for Class A new construction. However, existing Class B & C multifamily communities can stand up to market volatility and market imbalances. Let's examine why there has been such an unprecedented growth in the luxury market and what happens when demand slows.

The Demand for Luxury is High

There are two key drivers behind the increasing demand for luxury homes. Generation Y and baby boomers who are empty-nesters are flocking to city centers like Boston, Austin & Denver with a desire for high-end finishes and amenity-packed properties. One of the main reasons for this boom is that many double income households, as well as empty nesters with the money to purchase are choosing to rent. High-end gyms, concierge services and full-service spas for pet owners are all becoming regular. It seems like there is an astonishing number of amenities offered with every new construction. These kinds of modern amenities are being incorporated into development projects rapidly however, it's not cheap.

The cost of construction can be expensive.

Luxury housing is the main reason why the majority of developments in the marketplace are of high-end quality. This is due to the rising cost of construction labor. Construction labor is highly sought-after and materials are priced at their highest ever price. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxury building or in an affordable construction. It's the same price." It's the identical." Cities are having to enact regulations to force developers to construct an amount of affordable homes within their new construction projects. Most often, between 10% and 20% based on the number of units and the location. These regulations will not lead to an increase in housing for the poor.

If Affordable Housing Isn't Constructed, What's the alternative? Discover more here.

There have been many cycles of boom and bust in the building industry over the decades. In many areas across the country, you will find a large number of apartment buildings built in the 1970's and the 1990's. While these homes may appear out-of-date compared to the current construction but the "bonesremain in good shape. Buildings built during this time frame were constructed using modern techniques and materials. They typically only need surface rehabbing with the replacement of wear and tear items. These communities and their secondary markets are well-positioned to offset the flood of luxury homes. They also provide affordable housing. These Class B properties can thrive in any economic environment. If the economy is robust, Class C tenants shift to Class B properties. When the economy is in decline tenants of Class A are forced to relocate to more affordable Class B homes. These homes are usually available for less than the cost of building. This lets investors offer the perfect property to live in and yet still pay attractive rents that tenants with different income levels are able to afford.
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