CNBC issued a report this week that stated that the multifamily realty sector is experiencing an "acute crisis". According to the report the upper-end of the luxury market is too crowded and vulnerable to market fluctuations or flattening. Developers of apartments in the 150 largest US towns delivered 395 775 new housing units last fiscal year. This is an increase of 46% compared to the previous year. Of these new housing units, nearly 75-80% of them are considered luxury communities. ,Discover more here.

When I lived in Boston during the last couple of years, I have witnessed several major developments being constructed at an incredibly rapid pace. A majority of these developments are luxury homes that the majority of people are unable to afford. In reality, the Spotlight Team at the Boston Globe recently published a number of pieces that focused on the development of the new "Seaport" neighborhood. The article pointed out the absence of affordable housing and an abundance of luxury houses which does not serve the diverse population of the city.

With the arrival of all of these new multi-family luxury properties is this putting the entire multifamily market at risk of a flattening or even a collapse? The risk of Class A new construction is apparent if the market flattens but the existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances and corrections. Let's look at the reasons for this boom in luxury, and what happens if it is over.

The demand for luxury goods is strong

There are two important factors that drive the demand for luxury apartments. Generation Y and baby boomers who are empty-nesters are descending on city centers such as Boston, Austin & Denver with a keen interest in high-end finishes and amenity-packed properties. The rise in popularity can be attributed to the trend that empty nesters and double-income millennial households are opting to rent instead than purchase. Facilities like top-of-the-line gyms, concierge services, and pet spas that are full-service are now the norm. With each new building it appears that there's an arms race. These kinds of modern amenities are being incorporated into development projects at a rapid pace and aren't cheap.

The cost of construction can be expensive.

The primary reason for the overwhelming majority of new housing complexes you see being put up for sale is expensive is because of the ever-rising price of construction labor and building materials. Construction labor is in high demand and materials are at their highest ever price. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or low-cost ones." It's the same price." It costs the identical." Cities are forced to pass rules that require developers to create the right amount of affordable units in their new construction projects. The average number of units as well as the location will determine how the developers will be able to charge. But, on their own, these rules won't result in a significant growth in affordable housing.

If Affordable Housing Isn't Built, What is the alternative? Web site.

There have been many boom and bust cycles within the construction industry over the years. In many areas across the country, you will see a lot of apartments constructed between the 1970's and 1990's. While these properties may feel very out of date compared to what's being built nowadays however, they're "bones" are in good shape. The buildings built during this time were built using the most modern materials and techniques. They usually need only surface repairs and wear items can be replaced. These communities as well as the secondary markets they serve are well placed to counteract the overflow of luxurious apartment buildings. They also provide affordable housing. The benefit of these Class B properties is that they generally are able to perform well regardless of the economic conditions. When the economy is thriving, Class C tenants move up into Class B properties When the economy is suffering, Class A tenants can not afford the high rents and typically move down to Class B properties. Investors can usually buy these homes for a fraction of the cost of building and can thus provide a comfortable home, but maintain rents in a range that is appealing to tenants of many income levels.
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