The week before, CNBC published an article in which they claimed that "There is an urgent crisis coming our way" in the multifamily real estate industry. The article surmises that the upper end of the market for luxury is over-built and prone to flattening or a market correction. In fact, apartment developers in the largest 150 US cities built 395,775 new housing units in the last year, which represents an increase of 46% year-over-year. In these new homes, around 75-80% of them are considered to be luxury communities. ,Visit this link.

When I lived in Boston during the last couple of years, I've witnessed several major developments being constructed in a rapid manner. The majority of these properties are luxury homes that the majority of people are unable to afford. In fact, the Spotlight Team at the Boston Globe recently published a series of pieces that focused on the development of the new "Seaport" neighborhood. It highlighted the city's lack of affordable housing and the inordinate supply of luxury homes that don't meet the needs of the diverse population of the city.

With the advent of all these new luxury multifamily properties is this putting the entire multifamily sector at risk of flattening or even a collapse? The danger of Class A new construction is obvious if the market flattens but the the existing Class B & C multifamily communities are uniquely positioned to stand up to market imbalances and corrections. Let's go through why there has been such an unprecedented growth in the luxury market and what could happen if demand subsides.

Demand for luxury is on the rise

There are two important factors that drive the demand for luxury apartments. Millennials and empty nester baby boomers are moving to cities such as Boston Austin, Boston, and Denver, with a taste for luxury finishes and amenities-packed buildings. One reason for this boom is that many double income households, as well as empty nesters who can afford to purchase are choosing to rent. Luxury gyms, concierge service and spas with full-services for pets are all becoming regular. With each new building it appears that there is an amenities arms race. Developers are actively incorporating modern amenities into their plans, but they're not cheap.

New Construction is Cost Prohibitive

The reason the majority of new homes that are on the market is luxurious is because of the rising cost of construction labor and materials. Construction labor demand is at an all-time high and the cost of building materials is the most they have ever been. Toby Bozzuto is the CEO of the 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 cost. It's the identical." To ensure affordable housing cities are now enforcing laws that require developers to incorporate affordable units in new construction projects. The average number of units as well as the location will determine how much they will charge. The regulations won't result in an increase in housing for the poor.

What alternatives are there to affordable housing? Visit.

There have been many boom and bust cycles within the building industry throughout the decades. You will find many apartments built between 1970 and 1990 in various areas across the country. Although these homes may appear old-fashioned compared to what's being built in the present but the "bones" are in good shape. These buildings constructed in the frame were constructed using modern techniques and materials. They typically only need surface rehabbing and wear-related items replaced. These apartment communities, and the secondary markets they're in, are positioned well to counterbalance the influx of luxury new homes and maintain housing that is reasonably affordable. The benefit of these Class B properties is that they generally perform well regardless of the economic conditions. When the economy is strong Class C tenants can are able to move into Class B properties . When the economy is in decline the Class A tenants will find it difficult to justify the extravagant rents and typically move down to class B properties. Investors are able to purchase these properties for less than the price of construction and can thus offer a wonderful place to live yet still keep the rents at a level attractive to tenants with varying income ranges.
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