CNBC issued a report this week that said that the multifamily real estate sector is facing an "acute crisis". The article surmises that the upper tier of the luxury market is overbuilt and susceptible to a flattening or market correction. In reality, apartment builders in the largest 150 US cities delivered 395,775 new housing units last year, which marks an increase of 46% year-over-year. Of these new housing units, nearly 75-80% are considered luxury communities. ,Read more here.

I've seen a lot of major developments being built at a rapid pace during my time in Boston over the last few years. It's not surprising that the vast majority of these homes are luxury homes that your average citizens cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article highlighted its lack of affordable housing as well as an overabundance of luxury housing which does not serve the diverse population within the city.

Are these multifamily developments an imminent threat to the multifamily market? The danger of Class A new construction is apparent if the market flattens, however; the existing Class B & C multifamily communities are uniquely placed to withstand market imbalances as well as corrections. Let's take a look at the motives of this luxury boom and what happens if it ends.

The demand for luxury goods is high.

There are a few major factors driving the demand for luxury apartments. Baby boomers and empty nesters are moving into cities like Boston, Austin & Denver with a keen interest in luxury finishes and luxurious buildings. One reason for this growth is that lots of double-income households, as well as empty nesters who can afford to buy are opting to rent. The latest gyms, concierge services and full-service spas for pet owners are now regular. It seems like there is an astonishing number of amenities offered with every new construction. Developers are rushing to incorporate modern amenities in their developments, however, it doesn't come inexpensively.

New construction is expensive.

Luxury housing is the main reason why the majority of new developments that are on the market are expensive. This is because of the growing cost of construction work. Construction labor is highly sought-after and the materials are at their most expensive ever. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious structures or in affordable ones." It's the same cost. It's the same." Cities are having to enact rules that require developers to construct the right amount of affordable homes within their construction projects. Typically between 10%-20% depending on the unit count and the location. This will not result in an increase in housing for the poor.

If Affordable Housing Can't Be Constructed, What's the Alternative? Visit website.

Over the past few decades, there have been building boom and bust cycles. There are many apartments built between 1970 and 90 in various cities 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 during this time were built using the most modern materials and techniques. They usually just require minor repairs, and wear and tear items can be repaired. These communities as well as their secondary markets are well-positioned to counteract the overflow of luxurious apartment buildings. They also offer affordable housing. The best part about Class B properties is that they typically excel across all economic climates. If the economy is robust, Class C tenants are able to move into Class B homes. If the economy is weak tenants of Class A are forced to move down to more affordable Class B homes. These properties are often offered for less than the price of construction. This lets investors offer the perfect location to live in and yet still pay attractive rents that tenants of different income levels are able to afford.
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