CNBC issued a report this week that stated that the multifamily realty market is experiencing an "acute crisis". The article concludes that the top end of the market for luxury is overbuilt and susceptible to a flattening or market correction. In reality, apartment builders in the largest 150 US cities constructed 395,775 brand new housing units in the last year, which is an increase of 46% Y-o-Y. About 75-80% of these new units of housing are luxury communities. ,Read more.

In my time in Boston during the last couple of years, I've witnessed many major developments being built in a rapid manner. As a result, the overwhelming majority of these are high-end luxury apartments which the average citizen are unable to afford. In fact it was the Spotlight Team at the Boston Globe recently published a number of articles that focused on the growth of the "Seaport" neighborhood. The article pointed out the absence of affordable housing and an abundance of luxury houses that do not meet the needs of the diverse population of the city.

Do these multifamily developments pose an imminent threat to the multifamily sector? If the market slows down, there is a risk of a collapse for Class A new construction. However existing Class B & C multifamily communities can withstand market volatility and market imbalances. Let's examine the causes of this luxury boom and what happens if it ends.

The Demand for Luxury is High

There are a few important factors that drive the increasing demand for luxury homes. Millennials and empty nester baby boomers are making their way to cities such as Boston, Austin, and Denver with a discerning palate for luxurious finishes and amenities-packed properties. One specific reason for this growth is that many double income households of millennials and empty nesters with the money to buy are opting to rent. Perks such as high-end fitness centers, concierge services, and pet spas that are full-service are becoming the standard. With every new development there is a sense that there is an amenities arms race. These kinds of modern facilities are being integrated into the projects of developers at a rapid pace however, it's not cheap.

New Construction is Cost Prohibitive

Luxury housing is the main reason why the majority of new developments that are on the market are high-end. This is due to the rising cost of construction work. The demand for construction labor is at an all-time high and the cost of building materials is at their highest ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious structures or in affordable ones." It costs the same." It costs the identical." To ensure affordable housing cities are enforcing rules that require developers to incorporate affordable units in construction plans. Most often, between 10% and 20% based on the unit count and location. This will not lead to an increase in the number of affordable homes.

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

There have been numerous cycles of boom and bust within the construction industry over the years. In many areas across the country, you will notice large numbers of homes built between the 1970's-1990's. Although these homes may appear outdated when compared to the buildings that are being built nowadays, the "bones" are quite good. These buildings were constructed using advanced materials and techniques. They generally just require minor repairs, and wear-related items are able to be replaced. These communities, as well as the secondary markets they're in, are positioned well to counterbalance the flood of luxury homes being built and maintain housing that is relatively affordable. The Class B homes can thrive in any economic environment. If the economy is flourishing Class C tenants are able to are able to move into Class B properties When the economy is in decline and Class A tenants are unable to not afford the high rents and typically move down to class B properties. They are typically offered for less than the price of construction. This allows investors to offer the perfect property to live in while still offering attractive rents that tenants of different incomes can afford.
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