In the last week, CNBC published an article suggesting that "There is a crisis of extreme proportions coming our way" within the multifamily real estate sector. The article concludes that the top end of the luxury market is over-built and prone to a flattening or a market correction. Apartment developers in the largest 150 US towns constructed 395 775 new housing units last financial year. This represents an increase of 46% compared to the previous year. Nearly 75-80% of these new units of housing are luxurious communities. ,Web site.

I've seen a lot of major development projects being constructed at an incredible pace when I lived in Boston for the past few years. The majority of these properties are expensive luxury apartments that most people cannot afford. In actuality, the Spotlight Team at the Boston Globe recently released a set of pieces that focused on the growth of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing, as well as the excess of luxury housing which doesn't accommodate its diverse population.

Do these multifamily developments pose an imminent threat to the multifamily sector? If the market is flat and the risk of collapse increases, it is of a collapse for Class A new construction. However existing Class B & C multifamily communities are able to withstand market fluctuations and imbalances. Let's look at the reasons of this luxury boom and what happens if it is over.

Demand for luxury is on the rise

There are a few major factors driving the demand for luxury apartments. Generation Y and empty nester baby boomers are moving to cities like Boston, Austin, and Denver. They have a keen taste for luxurious finishes and amenities-packed structures. The rise in popularity is due to the reality that empty-nesters and families with double incomes in the millennial generation are opting to rent instead to purchase. High-end gyms, concierge services and full-service spas for pets are all becoming the norm. With every new development, it seems as though there's an arms race. These types of modern amenities are being incorporated into developers' projects rapidly and aren't cheap.

New Construction is costly.

The main reason why the vast majority of the new housing complexes you see being put up for sale is expensive is because of the rising costs of construction materials and labor. Construction labor is in high demand and the materials are at their highest price ever. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxury building or in a budget-friendly building. It costs the same." Due to the high cost of prices for labor and materials as well as the appreciation of the raw land, developers are obliged to build luxurious products because the numbers simply don't make sense to construct anything else. Cities are having to enact rules that require developers to create a certain number of affordable units in their new construction projects. Most often, between 10% and 20% based on unit count and location. But, on their own, these rules will not provide a meaningful increase in the amount of affordable housing.

If Affordable Housing Can't Be Built, what is the Alternative? Visit.

There have been many boom and bust cycles in the construction industry over the years. In many areas across the country, you'll find a large number of apartments constructed between the 1970's and the 1990's. While these properties may feel very out of date compared to what's being built in the present however, they're "bones" are good. These buildings constructed in the frame were built with contemporary materials and techniques, and typically require only surface renovations with the replacement of wear and tear items. These communities and the secondary markets they serve are well placed to counteract the overflow of luxurious apartments. They also provide affordable housing. The great thing about these Class B properties is that they generally perform well in all economic climates. If the economy is robust Class C tenants can shift to Class B properties. When the economy is weak, tenants of Class A are forced to move down to more affordable Class B properties. They are typically available for less than the cost of building. This allows investors to offer the perfect property to live in while still offering appealing rents that tenants of different income levels can afford.
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