In the last week, CNBC published an article which suggested that "There is an acute crisis headed our way" within the multifamily real estate market. The article surmises that the top end of the market for luxury is over-built and prone to flattening or a market correction. In fact, apartment developers in the largest 150 US cities delivered 395,775 new housing units last year, which represents an increase of 46% year-over-year. Of these new homes, around 75-80% are considered luxury communities. ,Visit.

In my time in Boston in the last few years, I've witnessed many major developments being built in a rapid manner. The majority of these properties are luxurious luxury residences that most people cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing, as well as the excess of luxury housing that don't meet the needs of its diverse population.

With the emergence of all of these new luxurious multifamily homes is this putting the entire multifamily industry at risk of a collapse or flattening? The risk to Class A new construction is obvious if the market flattens but the the existing Class B & C multifamily communities are uniquely placed to withstand market imbalances as well as corrections. Let's examine the reasons for such an increase in luxury and what happens in the event that demand declines.

Demand for luxury is on the rise

There are two major reasons for the rising demand for luxury homes. Baby boomers and empty nesters are descending on city centers such as Boston, Austin & Denver with a keen interest in high-end finishes and amenity-packed buildings. This boom can be attributed to the reality that empty-nesters and double-income millennial households are choosing to rent rather to purchase. High-end gyms, concierge services and spas with full-services for pets are all becoming commonplace. There's an appalling amount of amenities being offered with each new building. Developers are actively incorporating these types of modern perks into their plans, but, it doesn't come cheap.

New construction is expensive

The primary reason for the majority of new residential developments being put up for sale is luxurious is because of the increasing costs of construction labor and building materials. The demand for construction labor is at an all-time high and the price of building materials is at the highest they've ever been. Toby Bozzuto is the CEO of the 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." Because of the high prices for labor and materials as well as the appreciation of the raw land, developers are forced to build luxury products because the numbers simply don't make sense to construct any other kind of building. To make sure that affordable housing is available cities are now enforcing laws which require developers to build affordable units in construction plans. Most often, between 10% and 20% based on the unit count and location. But these rules alone do not guarantee a significant increase in the number of affordable housing.

If Affordable Housing isn't Built, What is the Alternative? Visit website.

There have been many cycles of boom and bust within the building industry throughout the decades. In many areas across the country, you'll see a lot of apartments constructed between the 1970's-1990's. Although these properties might seem out-of-date compared to the current construction however, the "bonesare still in good condition. Built during this period were built using the most advanced 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-positioned to counter the influx of luxurious homes. They also offer affordable housing. The benefit of these Class B homes is that they generally perform well regardless of the economic conditions. When the economy is strong, Class C tenants shift to Class B properties. If the economy is struggling Class A tenants have to shift to Class B properties. Investors can typically purchase these properties for only a small portion of the cost to build and can thus provide a comfortable place to live yet still keep the rents at a level attractive to tenants of many income ranges.
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