CNBC issued a report this week stating that the multifamily realty market is in the midst of an "acute crisis". According to the article, the luxury market's upper end is too crowded and vulnerable to market fluctuations or flattening. Apartment developers in the largest 150 US towns constructed 395 775 housing units during the fiscal year. This is an increase of 46% compared to previous years. Of these new homes, around 75-80% are considered luxury communities. ,Discover more.

I've seen a lot of major developments being built at a rapid pace while living in Boston for the past few years. It's not surprising that the vast majority of these are high-end luxury apartments that the average person cannot afford. In actuality there is a reason why the Spotlight Team at the Boston Globe recently published a series of articles that focused on the creation 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 advent of all these luxurious multifamily homes is this putting the entire multifamily market at risk of collapse or flattening? 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 can withstand market corrections and imbalances. Let's look at the reasons the reasons for such a luxury boom and what happens if demand subsides.

The demand for luxury goods is strong

There are two main drivers of the growing demand for luxury apartments. Generation Y and empty nester baby boomers are moving to cities such as Boston and Austin as well as Denver, with a taste for luxury finishes and amenities-packed buildings. One specific reason to this increase is that many double income millennial households and empty nesters that can afford to buy are opting to rent. High-end gyms, concierge services and full-service spas for pet owners are now regular. With each new building, it seems as though there is an amenities arms race. These types of modern facilities are being integrated into development projects rapidly however, it's not cheap.

New construction is expensive

The main reason that the majority of new developments that are on the market are high-end. This is because of the rising cost of construction work. Construction labor demand is at an all-time high and the price of building materials is the most they have ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury structure or in an affordable building. It costs the same." Due to the high cost of cost of labor and materials, and the appreciation of the natural resources developers are being required to construct luxury homes since the numbers don't make sense to construct any other kind of building. To ensure affordable housing, cities are enforcing regulations that require developers to incorporate affordable units in new construction projects. The average unit count and the location determines how much they charge. But these rules alone won't result in a significant increase in the number of affordable housing.

What alternatives are there for affordable housing? Going here.

Over the past few decades, there have been building booms and busts. There are many apartments built between 1970 and 1990 in various cities across the nation. While they may seem outdated compared to current construction however, the "bones” are still good. The buildings built during this time were constructed with modern techniques and materials. They usually only require surface rehabilitation and wear and tear items can be replaced. These apartment communities, and the secondary markets they're located in are strategically placed to counterbalance the flood of luxury new homes and provide housing that's fairly affordable. The benefit of these Class B homes is that they generally excel in all economic climates. When the economy is thriving Class C tenants are able to shift to Class B properties When the economy is suffering and Class A tenants are unable to no longer justify the luxury rents and typically move down to more affordable Class B properties. Investors are able to buy these homes for less than the price of construction and can thus offer a wonderful living space, yet ensure that rents remain at a level attractive to tenants of many income levels.
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