The week before, CNBC published an article which suggested that "There is an urgent crisis that is coming towards us" in the multifamily real estate industry. The article surmises that the top end of the luxury market is overbuilt and vulnerable to a flattening or market correction. Apartment developers in the 150 largest US towns constructed 395 775 new housing units during the fiscal year. This represents an increase of 46% over the previous year. Nearly 75-80% of these new units of housing are high-end communities. ,Learn more.

I've seen a lot of major development projects being constructed at an incredible pace during my time in Boston over the last few years. Not surprisingly, the overwhelming majority of these properties are luxury homes which the average citizen cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. The article highlighted its lack of affordable housing as well as an abundance of luxury houses that do not meet the needs of the diverse population in the city.

With the advent of all these new luxury multifamily properties could this put the entire multifamily sector at risk of a flattening or even a collapse? If the market is flat, there is a risk for Class A new construction. However, existing Class B & C multifamily communities are able to withstand market corrections and imbalances. Let's take a look at the motives for this luxury boom, and what happens if the boom is over.

The Demand for Luxury is High

There are two main drivers of the growing demand for luxury apartments. Baby boomers are making their way to cities like Boston Austin, Boston, and Denver with a discerning palate for high-end finishes and luxurious buildings. This boom is due to the trend that empty nesters and families with double incomes in the millennial generation are choosing to rent rather than buy. Luxury gyms, concierge service and full-service spas for pets are all becoming regular. There is an appalling number of amenities offered with every new construction. Developers are aggressively incorporating these types of modern perks into their plans, but it's not inexpensively.

Construction costs are high for new construction.

The reason the majority of new residential developments that are on the market is luxury is due to the ever-rising price of construction labor and materials. The demand for construction work is at an all-time high and the cost of materials is at the highest they've ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury building or in a low-cost building. It's the same price. Due to the high cost of materials and labor costs and the rising value of the natural resources developers are being forced to build luxury products since the numbers don't allow for building any other kind of building. Cities are having to enact rules that require developers to build a certain number of affordable units in their new construction projects. Most often, between 10% and 20% based on the unit count and the location. This will not lead to an increase in housing for the poor.

If Affordable Housing Isn't Constructed, What's the Alternative? Visit.

Over the past few decades, there have been several building booms and busts. You will find many apartments constructed between 1970 and 1990 in various areas across the United States. While these homes may appear out-of-date compared to the current construction but the "bonesremain in good shape. These buildings constructed in the frame were built with contemporary materials and techniques, and typically only need surface rehabbing with the replacement of wear and tear items. These communities, as well as the secondary markets they're located in are strategically placed to take on the flood of luxury homes being built and to maintain housing that's reasonably affordable. The Class B homes can thrive in any economic environment. If the economy is flourishing Class C tenants are able to move up into Class B properties . When the economy is suffering the Class A tenants will not afford the high rents and are typically forced to move to more affordable Class B properties. These properties are often available for less than the cost of building. This allows investors to offer the perfect place to call home and still maintain appealing rents that tenants of different income levels can afford.
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