The week before, CNBC published an article which suggested that "There is an urgent crisis coming towards us" within the multifamily real estate market. The article suggests that the upper tier of the market for luxury is overbuilt and vulnerable to a flattening or a market correction. Developers of apartments in the 150 largest US towns delivered 395 775 new housing units last fiscal year. This represents an increase of 46% compared to previous years. Of these new homes, around 75-80% of them are considered luxury communities. ,Find out more.

In my time in Boston during the last couple of years, I have witnessed many major developments being built at an incredibly rapid pace. Most of these homes are expensive luxury apartments which the majority of people can't afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. The article pointed out the absence of affordable housing and the overabundance of luxury homes which does not serve the diverse population of the city.

Do these multifamily developments pose danger to the multifamily market? The risk to Class A new construction is apparent if the market flattens but the existing Class B & C multifamily communities are well-positioned to withstand market imbalances as well as corrections. Let's go through the reasons behind why there's been an increase in luxury and what will happen in the event that demand declines.

Luxury Demand is Strong

There are two main reasons of the growing demand for luxury homes. Millennials and empty nester baby boomers are making their way to cities like Boston Austin, Boston, and Denver, with a taste for high-end finishes and luxurious properties. This growth can be attributed to the fact that empty nesters and families with double incomes in the millennial generation are opting to rent instead than purchase. Perks such as high-end fitness centers, concierge services, and fully-service pet spas are becoming standard. Every time a new construction is completed it appears that there is an amenities arms race. These types of modern amenities are being incorporated into development projects at a rapid pace, but it isn't cheap.

New construction is expensive.

The main reason why the vast majority of the new homes that are on the market is luxurious is because of the rising cost of construction labor and materials. Construction labor is highly sought-after and materials are priced at their highest ever price. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't need to be in high-end structures or in affordable ones." It costs the same." Due to the high cost of materials and labor costs and the rise in the value of raw land developers are being required to construct luxury homes due to the fact that the numbers do not allow for building any other type of construction. Cities are forced to pass laws that force developers to build a certain number of affordable units within their construction projects. The typical range is between 10 and 20%, based on the number of units and the location. This will not cause an increase in housing for the poor.

What are the alternatives for affordable housing? Website.

There have been many cycles of boom and bust in the building industry throughout the years. In many markets around the country, you will see a lot of apartments constructed between the 1970's-1990's. While these properties may feel very out of date when compared to the buildings that are being built nowadays, the "bones" are in good shape. These buildings were constructed using advanced materials and techniques. They usually only require surface rehabilitation and wear-related items are able to be repaired. These communities, as well as the secondary markets they serve are well placed to counteract the overflow of luxury homes. They also provide affordable housing. These Class B properties are able to perform in any economic climate. When the economy is strong, Class C tenants move up into Class B properties When the economy is in decline, Class A tenants can no longer justify the luxury rents, and they typically shift to more affordable class B properties. Investors can usually purchase these properties at only a small portion of the cost to build and can thus offer a wonderful place to live yet still ensure that rents remain affordable to tenants with varying income levels.
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