In the last week, CNBC published an article suggesting that "There is a crisis of extreme proportions that is coming our way" in the multifamily real estate industry. The article surmises that the upper end of the luxury market is over-built and prone to a flattening or market correction. Apartment developers in the top 150 US towns constructed 395 775 new housing units in the last fiscal year. This is a 46% increase over previous years. Of these new homes, around 75-80% are considered luxury communities. ,Click here.

When I lived in Boston in the last few years, I have witnessed many major developments being built at an incredibly rapid pace. The majority of these properties are expensive luxury apartments that the majority of people are unable to afford. In actuality there is a reason why the Spotlight Team at the Boston Globe recently published a number of articles that focused on development of the new "Seaport" neighborhood. It highlighted the city's lack of affordable housing as well as the inordinate supply of luxury homes that doesn't cater to its diverse population.

Do these multifamily developments pose a threat to the multifamily sector? If the market slows down, there is a risk for Class A new construction. However, the existing Class B & C multifamily communities can stand up to market fluctuations and imbalances. Let's examine the causes of this luxury boom and what happens if it is over.

The demand for luxury goods is high.

There are a few major factors driving the demand for luxury apartments. Baby boomers are moving into cities like Boston Austin, Boston, and Denver, with a taste for luxury finishes and amenities-packed properties. This boom is due to the reality that empty-nesters and families with double incomes in the millennial generation prefer renting rather than purchase. High-end gyms, concierge services and full-service spas for pet owners are all becoming regular. There's an appalling amount of amenities being offered in every new building. Developers are rushing to incorporate modern amenities into their projects; however, it doesn't come inexpensively.

New construction is expensive

The primary reason for the vast majority of the new housing complexes you see that are on the market is expensive is because of the ever-rising cost of construction labor and materials. Construction is a high-demand industry 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 priced the same." It's the identical." Cities are having to enact regulations to force developers to create an amount of affordable homes within their construction projects. The average unit count and the location determines how much they charge. But, on their own, these rules will not provide a meaningful increase in the amount of affordable housing.

If Affordable Housing Can't Be Constructed, What's the alternative? View source.

Throughout the decades there has been building booms and busts. In many markets around the country, you'll see a lot of apartments constructed between the 1970's and the 1990's. While these homes may appear outdated compared to current construction however, the "bonesare still in good condition. The buildings built in the frame were built with contemporary materials and techniques, and typically require only surface renovations and wear-related items replaced. These communities and their secondary markets are well placed to counter the influx of luxurious apartment buildings. They also provide affordable housing. The benefit of these Class B homes is that they tend to are able to perform well in all economic climates. If the economy is robust, Class C tenants move into Class B properties. If the economy is weak Class A tenants have to shift to Class B homes. These homes are usually accessible for less than cost of building. This lets investors offer the perfect location to live in and still maintain appealing rents that tenants of different incomes can afford.
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