The week before, CNBC published an article suggesting that "There is an acute crisis that is coming our way" in the multifamily real estate sector. The article concludes that the top end of the luxury market is overbuilt and vulnerable to a flattening or a market correction. Apartment developers in the top 150 US towns constructed 395 775 new housing units during the financial year. This represents an increase of 46% compared to the previous year. Of these new units of housing, about 75-80% of them are considered to be luxury communities. ,Going here.

While living in Boston over the past few years, I have witnessed many major developments being built at an incredibly rapid pace. As a result, the overwhelming majority of these homes are high-end luxury apartments that the average person can't afford. In actuality there is a reason why the Spotlight Team at the Boston Globe recently published a number of pieces that focused on the creation of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing as well as the inordinate supply of luxury homes that don't meet the needs of the diverse population of the city.

Are these multifamily developments an imminent threat to the multifamily industry? If the market flattens 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 corrections and imbalances. Let's look at the reasons for this boom in luxury, and what happens if the boom is over.

The demand for luxury goods is strong

There are two important factors that drive the demand for luxury apartments. Millennials and empty nester baby boomers are making their way to cities such as Boston and Austin as well as Denver with a discerning palate for high-end finishes and luxurious structures. This growth can be attributed to the reality that empty-nesters and families with double incomes in the millennial generation are opting to rent instead than buy. The latest gyms, concierge services and full-service spas for pet owners are all becoming commonplace. With each new building there is a sense that there's an arms race. Modern amenities are being included in the projects of developers rapidly, but it isn't cheap.

New construction is expensive

High-end housing is the primary reason that the majority of developments on the market are expensive. This is because of the growing cost of construction labor. The demand for construction work is at an all-time high and the cost of materials is at the highest they've ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't need to be in high-end buildings or low-cost ones." It's the same cost. As a result of high prices for labor and materials as well as the rising value of the raw land developers are being obliged to build luxurious products due to the fact that the numbers do not make sense to construct any other kind of building. To make sure that affordable housing is available, cities are enforcing regulations that require developers to include affordable units within their new construction projects. Typically between 10%-20% depending on unit count and location. The regulations won't result in an increase in the number of affordable homes.

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

Throughout the decades there has been building booms and busts. In many areas across the country, you'll find a large number of apartment buildings built in the 1970's and 1990's. Although these homes may appear old-fashioned compared to what's being built in the present however, they're "bones" are good. Buildings built during this time frame were built with contemporary materials and techniques, and typically require only surface renovations and wear-related items replaced. These communities as well as the secondary markets they serve are well placed to counter the influx of luxurious homes. They also offer affordable housing. These Class B properties can succeed in any economic situation. If the economy is robust Class C tenants can shift to Class B properties. When the economy is in decline tenants of Class A have to shift to more affordable Class B properties. They are typically available for less than the cost of building. This allows investors to offer a great property to live in and yet still pay attractive rents that tenants with different income levels can afford.
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