CNBC issued a report this week that stated that the multifamily real estate sector is experiencing an "acute crisis". The article concludes that the upper end of the luxury market is overbuilt and susceptible to a flattening or a market correction. Apartment developers in the 150 largest US towns built 395 775 new housing units last financial year. This is a 46% increase over previous years. Nearly 75-80% of these new housing units are luxury communities. ,Clicking here.

I've witnessed many large developments built at breakneck speed during my time in Boston over the last few years. Most of these homes are luxury homes which the majority of people can't afford. In reality, the Spotlight Team at the Boston Globe recently published a series of articles that focused on creation of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing and the excess of luxury housing which doesn't accommodate its diverse population.

Do these multifamily developments pose an imminent threat to the multifamily market? The risk of Class A new construction is evident if the market is flat but the the existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances and corrections. Let's look at the reasons the reasons behind why there's been a luxury boom and what will happen when demand slows.

The demand for luxury goods is strong

There are a couple of major factors driving the rising demand for luxury apartments. Baby boomers and empty nesters are descending on city centers like Boston, Austin & Denver with a desire for luxury finishes and luxurious structures. One of the main reasons for this boom is that many double income millennial households and empty nesters who can afford to buy are opting to rent. High-end gyms, concierge services and full-service spas for pet owners are now the norm. With every new development there is a sense that there's an arms race. These kinds of modern facilities are being integrated into development projects at a rapid pace however, it's not cheap.

New construction is expensive.

The reason the overwhelming majority of new residential developments that are on the market is luxury is due to the rising costs of construction labor and building materials. The demand for construction labor is at an all-time high, and the price of building materials is at the highest they've ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxurious building or in a budget-friendly structure. It's exactly the same price. As a result of high prices for labor and materials as well as the rise in the value of natural resources developers are being obliged to build luxurious products because the numbers simply don't work to build anything else. To provide affordable housing cities are now enforcing laws that require developers to incorporate affordable units within their new construction projects. Most often, between 10% and 20% based on the unit count and location. The regulations won't cause an increase in housing for the poor.

What alternatives are there for affordable housing? Go here.

Over the past few decades, there has been building booms and busts. There are many apartment buildings built between 1970 and 90 in various markets across the nation. While they may seem out-of-date compared to the current construction but the "bonesremain in good shape. These buildings constructed in the frame have been constructed with modern techniques and materials. They 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 new luxury apartments and provide housing that's fairly affordable. The benefit of these Class B properties is that they tend to perform well across all economic climates. If the economy is flourishing Class C tenants can are able to move into Class B properties . When the economy is suffering, Class A tenants can find it difficult to justify the extravagant rents, and they typically shift to class B properties. Investors can usually purchase these properties at a fraction of the cost to build they can offer a wonderful place to live yet still keep the rents in a range that is appealing to tenants with varying income ranges.
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