The week before, CNBC published an article suggesting that "There is an urgent crisis coming towards us" within the multifamily real estate industry. According to the article, the upper-end of the luxury market is overcrowded and susceptible to market fluctuations or flattening. Apartment developers in the 150 largest US towns constructed 395 775 new housing units last financial year. This represents an increase of 46% compared to previous years. Of these new units of housing, about 75-80% of them are considered to be luxury communities. ,Read more.

In my time in Boston in the last few years, I've seen several major developments being constructed in a rapid manner. As a result, the overwhelming 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 growth of the "Seaport" neighborhood. The article highlighted the 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 industry? The danger to Class A new construction is evident if the market is flat but existing Class B & C multifamily communities are well-positioned to stand up to market imbalances and corrections. Let's look at the reasons the reasons for such a luxury boom and what will happen in the event that demand declines.

The demand for luxury goods is strong

There are a couple of important factors that drive the increasing demand for luxury homes. Millennials and empty nester baby boomers are making their way to cities like Boston, Austin, and Denver, with a taste for luxury finishes and amenities-packed properties. One reason for this boom is that lots of double-income households of millennials and empty nesters who can afford to buy are choosing to rent. High-end gyms, concierge services and spas with full-services for pets are now commonplace. There is an astonishing amount of amenities being offered with every new construction. Developers are rushing to incorporate these types of modern perks in their developments, however it's not cheap.

New construction is expensive

The main reason that the majority of new developments that are on the market are high-end. This is because of the growing cost of construction work. Construction labor is in high demand and materials are priced at their highest ever price. 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 construction. It costs the same." It costs the same." To make sure that affordable housing is available cities are enforcing rules that require developers to incorporate affordable units in new construction projects. The number of units and the location determines how much they charge. But these rules alone won't result in a significant growth in affordable housing.

What alternatives are there to housing that is affordable? More info.

Through the years, there have been several building booms and busts. There are many apartments built between 1970 and 1990 in various markets across the United States. While they may seem out-of-date compared to the current construction, the "bonesare still in good condition. The buildings built in the frame were built with contemporary materials and techniques, and generally only require surface rehabilitation and wear-related items replaced. These apartment communities, and the secondary markets that they're in are well-positioned to counterbalance the flood of luxury homes being built and maintain housing that is fairly affordable. These Class B properties can succeed in any economic situation. When the economy is strong, Class C tenants move up into Class B properties When the economy is suffering, Class A tenants can not afford the high 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 permits investors to provide a great location to live in and yet still pay attractive rents that tenants with different incomes can afford.
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