CNBC issued a report this week stating that the multifamily realty market is experiencing an "acute crisis". According to the report, the luxury market's upper end is overcrowded and susceptible to market declines or flattening. In fact, apartment developers in the top 150 US cities constructed 395,775 brand new housing units last year, which is an increase of 46% Y-o-Y. Of these new units of housing, about 75-80% are classified as luxury communities. ,Website.

When I lived in Boston over the past few years, I've seen many major developments being built in a rapid manner. As a result, the overwhelming majority of these are luxury homes that the average person cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing, as well as the inordinate supply of luxury homes that don't meet the needs of its diverse population.

Do these multifamily developments pose danger to the multifamily market? The danger of Class A new construction is obvious if the market flattens but existing Class B & C multifamily communities are uniquely placed to withstand market imbalances as well as corrections. Let's take a look at the motives of this luxury boom and what will happen if it comes to an end.

Luxury demand is strong

There are a few major factors driving the increasing demand for luxury homes. Millennials and empty nester baby boomers are moving to cities like Boston and Austin as well as Denver with a discerning palate for luxurious finishes and amenities-packed buildings. One reason for this growth is that many double income millennial households and empty nesters with the money to buy are opting to rent. Facilities like top-of-the-line fitness centers, concierge services and full-service pet spas are becoming the standard. With every new development it appears that there's an arms race. Modern facilities are being integrated into development projects in a fast-paced manner however, it's not cheap.

New construction is expensive.

The main reason for the fact that most new developments you see on the market are expensive. This is due to the increasing cost of construction work. Construction labor demand is at an all-time high, as is the cost of materials is the most they have ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury building or in an affordable building. It's priced the same." Because of the high cost of labor and materials, and the rising value of the natural resources developers are being forced to build luxury products since the numbers don't make sense to construct anything else. To provide affordable housing, cities are enforcing regulations which require developers to build affordable units in their new construction projects. The average unit count and the location determines how much they will charge. But, on their own, these rules won't result in a significant increase in the amount of affordable housing.

If Affordable Housing Can't Be Constructed, What's the alternative? Home page.

Throughout the decades there have been building boom and bust cycles. In numerous markets across the country, you'll notice large numbers of apartments constructed between the 1970's and 1990's. Although they may seem old-fashioned in comparison to the modern buildings being constructed today but they're "bones" are in good shape. The buildings built in the frame were built with modern materials and techniques and typically require only surface renovations with the replacement of wear and tear items. These communities as well as the secondary markets they serve are well-positioned to counteract the overflow of luxurious apartments. They also offer affordable housing. The Class B homes are able to thrive in any economic environment. When the economy is strong Class C tenants can move up into Class B properties When the economy is suffering and Class A tenants are unable to find it difficult to justify the extravagant rents, and they typically shift to more affordable class B properties. Investors can typically buy these homes for less than the cost of building, which allows them to provide a great home, but ensure that rents remain affordable to tenants with varying income ranges.
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