This past week, CNBC published an article suggesting that "There is an acute crisis coming towards us" in the multifamily real estate market. According to the report the market's luxury end is crowded and prone to market declines or flattening. In reality, apartment builders in the 150 largest US cities delivered 395,775 new housing units last year, which marks an increase of 46% Y-o-Y. Of the new units of housing, about 75-80% are classified as luxury communities. ,Click here.

I've seen many major development projects being constructed at an incredible pace when I lived in Boston in recent years. It's not surprising that the vast majority of these properties are high-end luxury apartments which the average citizen are unable to afford. In reality it was the Spotlight Team at the Boston Globe recently published a number of articles that focused on growth of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing and the inordinate supply of luxury homes that doesn't cater to its diverse population.

With the emergence of all these new luxury multifamily properties, does this put the entire multifamily sector at risk of a flattening or even a collapse? The risk of Class A new construction is evident if the market is flat but existing Class B & C multifamily communities are uniquely placed to stand up to market imbalances and corrections. Let's look at the reasons the reasons for such a luxury boom and what could happen if demand subsides.

Luxury Demand is Strong

There are two major reasons to the increasing demand for luxurious homes. Baby boomers and empty nesters are flocking to city centers like Boston, Austin & Denver with a desire for high-end finishes and amenity-packed structures. This growth can be attributed to the trend that empty nesters and families with double incomes in the millennial generation are choosing to rent rather to purchase. High-end gyms, concierge services and full-service spas for pet owners are all becoming commonplace. Every time a new construction is completed there is a sense that there's an arms race. Developers are actively incorporating modern amenities in their developments, however they're not inexpensively.

The cost of construction can be expensive.

The main reason that the majority of new developments that are on the market are expensive. This is because of the growing cost of construction work. The demand for construction work is at an all-time high, as is the price of building materials is the most they have ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxurious building or in a low-cost structure. It costs the same." It costs the same." Cities are being forced to adopt rules that require developers to create a certain number of affordable homes within their construction projects. The typical range is between 10 and 20%, based on the number of units and the location. But these rules alone will not provide a meaningful increase in the number of affordable housing.

If Affordable Housing Isn't Constructed, What's the alternative? Homepage.

There have been many cycles of boom and bust in the building industry over the years. You will find many apartments constructed between 1970 and 1990 in various markets across the nation. While these homes may appear out-of-date compared to the current construction, the "bonesare still in good condition. The buildings built during this time were constructed with modern materials and techniques. They typically only require surface rehabilitation and wear items can be repaired. These communities, as well as their secondary markets are well placed to offset the flood of luxurious homes. They also offer affordable housing. The best part about Class B homes is that they generally are able to perform well regardless of the economic conditions. If the economy is flourishing, Class C tenants move up into Class B properties When the economy is suffering the Class A tenants will no longer justify the luxury rents and typically move down to class B properties. They are typically available for less than the price of construction. This allows investors to offer an ideal place to call home while still offering attractive rents that tenants with different income levels are able to afford.
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