In the last week, CNBC published an article in which they claimed that "There is an urgent crisis headed towards us" within the multifamily real estate sector. According to the report, the upper-end of the luxury market is crowded and prone to market corrections or flattening. In fact, apartment developers in the 150 largest US cities constructed 395,775 brand new housing units last year, which is an increase of 46% year-over-year. About 75-80% of these new units of housing are high-end communities. ,Click this link.

While living in Boston over the past few years, I have witnessed several major developments being constructed at a breakneck speed. Most of these homes are luxury homes that the majority of people are unable to afford. In fact it was the Spotlight Team at the Boston Globe recently published a series of articles that focused on the development of the new "Seaport" neighborhood. It highlighted the city's lack of affordable housing as well as the excess of luxury housing that don't meet the needs of the diverse population of the city.

With the emergence of all these new luxurious multifamily homes is this putting the entire multifamily industry at risk of collapse or flattening? The threat 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 for such an increase in luxury and what could happen in the event that demand declines.

Luxury Demand is Strong

There are two major reasons for the rising demand for luxurious homes. Generation Y and baby boomers who are empty-nesters are moving into cities such as Boston, Austin & Denver with a desire for luxury finishes and luxurious properties. One reason for this boom is that a lot of double-income millennial households and empty nesters with the money to buy are choosing to rent. High-end gyms, concierge services and spas with full-services for pets are now regular. With each new building there is a sense that there's an arms race. Developers are actively incorporating modern amenities in their developments, however it's not inexpensively.

New Construction is Cost Prohibitive

The main reason that the majority of new developments that are on the market are high-end. This is because of the increasing cost of construction labor. Construction labor demand is at an all-time high and the cost of materials is at the highest they've ever been. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious buildings or low-cost ones." It's the same price." It costs the identical." Cities are forced to pass laws that force developers to build an amount of affordable homes within their new construction projects. Typically between 10%-20% depending on unit count and the location. These regulations will not cause an increase in housing for the poor.

What are the alternatives to affordable housing? Learn more.

Throughout the decades there have been several building booms and busts. You will find many apartments built between 1970 and 1990 in various areas across the nation. Although these properties might seem out-of-date compared to the current construction, the "bonesare still in good condition. The buildings built in the frame have been constructed with contemporary materials and techniques, and typically require only surface renovations with the replacement of wear and tear items. These communities, as well as the secondary markets that they're in, are positioned well to take on the flood of new luxury apartments and maintain housing that is fairly affordable. The Class B homes can succeed in any economic situation. When the economy is strong Class C tenants can shift to Class B properties. When the economy is struggling, Class A tenants are forced to move down to Class B homes. These properties are often accessible for less than cost of building. This allows investors to offer the perfect place to call home and still maintain attractive rents that tenants of different incomes are able to afford.
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