CNBC issued a report this week that stated that the multifamily realty sector is facing an "acute crisis". The article suggests that the upper tier of the luxury market is over-built and prone to a flattening or market correction. In fact, apartment developers in the largest 150 US cities built 395,775 new housing units last year, which is a 46% increase Y-o-Y. The majority of the new homes are in high-end communities. ,Read more.

I've seen many major development projects being constructed at an incredible pace while living in Boston over the last few years. Most of these homes are expensive luxury apartments which the majority of people can't afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article pointed out the absence of affordable housing, as well as an overabundance of luxury housing that do not meet the needs of the diverse population in the city.

Are these multifamily developments an imminent threat to the multifamily market? If the market flattens it could be a problem for Class A new construction. However, the existing Class B & C multifamily communities can stand up to market volatility and market imbalances. Let's look at the reasons the reasons behind why there's been an increase in luxury and what happens when demand slows.

The demand for luxury goods is high.

There are two major factors driving the increasing demand for luxury homes. Generation Y and empty nester baby boomers are moving to cities like Boston Austin, Boston, and Denver. They have a keen taste for high-end finishes and luxurious buildings. This growth is due to the reality that empty-nesters and households with double incomes prefer renting rather than buy. Luxury gyms, concierge service and full-service spas for pet owners are becoming more regular. Every time a new construction is completed it appears that there is an amenities arms race. Developers are rushing to incorporate these modern perks in their developments, however it's not cheap.

New construction is expensive.

Luxury housing is the main reason why the majority of developments on the market are expensive. This is because of the increasing cost of construction work. The demand for construction labor is at an all-time high, as is the cost of materials is the most they have ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury structures or in affordable ones." It's the same cost. It costs the identical." To ensure affordable housing, cities are enforcing regulations that require developers to incorporate affordable units in their construction plans. The typical range is between 10 and 20%, based on unit count and the location. This will not lead to an increase in housing for the poor.

What are the alternatives for affordable housing? Read more.

There have been numerous boom and bust cycles in the building industry throughout the years. There are many apartments constructed between 1970 and 1990 in various cities across the nation. Although these homes may appear outdated compared to what's being built in the present however, they're "bones" are in good shape. These buildings were built using the most modern materials and techniques. They usually need only surface repairs and wear and tear items can be replaced. These communities, as well as the secondary markets they're located in are strategically placed to counterbalance the flood of luxury new homes and to maintain housing that's reasonably affordable. These Class B properties can thrive in any economic environment. If the economy is flourishing Class C tenants can are able to move into Class B properties . When the economy is struggling and Class A tenants are unable to find it difficult to justify the extravagant rents, and they typically shift to Class B properties. These properties are often available for less than the price of construction. This lets investors offer a great place to call home and still maintain appealing rents that tenants of different incomes can afford.
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