In the last week, CNBC published an article in which they claimed that "There is an urgent crisis headed our way" within the multifamily real estate sector. The article surmises that the upper tier of the market for luxury is overbuilt and vulnerable to a flattening or market correction. Developers of apartments in the largest 150 US towns constructed 395 775 new housing units during the financial year. This is a 46% increase over the previous year. Of the new housing units, nearly 75-80% of them are classified as luxury communities. ,Find out more.

I've witnessed many large developments built at breakneck speed while living in Boston for the past few years. Most of these homes are luxurious luxury residences that the majority of people are unable to afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing and the overabundance luxury housing which doesn't accommodate the diverse population of the city.

Are these multifamily developments a threat to the multifamily market? The risk to Class A new construction is evident if the market is flat but the existing Class B & C multifamily communities are uniquely positioned to stand up to market imbalances and corrections. Let's look at the reasons of this luxury boom and what happens if it is over.

The Demand for Luxury is High

There are two major reasons for the rising demand for luxurious apartments. Millennials and empty nester baby boomers are making their way to cities such as Boston and Austin as well as Denver. They have a keen taste for luxury finishes and amenities-packed properties. This growth is due to the reality that empty-nesters and families with double incomes in the millennial generation prefer renting rather to purchase. Perks such as high-end fitness centers, concierge services and full-service pet spas are becoming standard. With every new development, it seems as though there is an amenities arms race. These kinds of modern facilities are being integrated into developers' projects rapidly and aren't cheap.

Construction costs are high for new construction.

Luxury housing is the main reason that the majority of new developments that are in the marketplace are of high-end quality. This is due to the increasing costs of construction labor. Construction labor is highly sought-after and materials are at their most expensive ever. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious buildings or low-cost ones." It's the same price. It's the identical." To provide affordable housing cities are now enforcing laws which require developers to build affordable units in their construction plans. The average unit count and the location determines how much they will charge. However, these regulations alone will not provide a meaningful increase in the number of affordable housing.

If Affordable Housing Isn't Constructed, What's the alternative? Homepage.

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 markets across the nation. Although these properties might seem out-of-date compared to the current construction, the "bonesare still in good condition. Built during this period were constructed using modern techniques and materials. They typically only require surface rehabilitation and wear and tear items can be replaced. These apartment communities, and the secondary markets they're located in are well-positioned to counterbalance the flood of new luxury apartments and to maintain housing that's fairly affordable. The best part about Class B properties is that they tend to perform well in all economic climates. If the economy is robust Class C tenants are able to move into Class B properties. If the economy is weak, tenants of Class A are forced to move down to Class B properties. They are typically offered for less than the cost of building. This permits investors to provide an ideal property to live in while still offering attractive rents that tenants of different incomes can afford.
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