CNBC issued a report this week that stated that the multifamily realty market is in the midst of an "acute crisis". According to the report the upper-end of the luxury market is too crowded and vulnerable to market declines or flattening. Developers of apartments in the 150 largest US towns built 395 775 new housing units last fiscal year. This represents a 46% increase over the previous year. In these new homes, around 75-80% of them are considered luxury communities. ,Read more here.

I've seen many major development projects being constructed at an incredible pace during my time in Boston for the past few years. A majority of these developments are luxurious luxury residences that the majority of people are unable to afford. In reality there is a reason why the Spotlight Team at the Boston Globe recently published a number of articles that focused on the development of the new "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing and the excess of luxury housing that doesn't cater to the diverse population of the city.

Are these multifamily developments an imminent threat to the multifamily market? The risk of Class A new construction is evident if the market is flat but existing Class B & C multifamily communities are well-positioned to withstand market imbalances as well as corrections. Let's go through the reasons for such an unprecedented growth in the luxury market and what could happen when demand slows.

The Demand for Luxury is High

There are two major reasons of the growing demand for luxury homes. Generation Y and baby boomers who are empty-nesters are descending on city centers like Boston, Austin & Denver with a discerning taste for luxury finishes and luxurious buildings. This boom is due to the trend that empty nesters and households with double incomes are opting to rent instead than buy. The latest gyms, concierge services and spas with full-services for pets are all becoming commonplace. With every new development there is a sense that there's an arms race. These types of modern amenities are being included in the projects of developers rapidly, but it isn't cheap.

New Construction is Cost Prohibitive

Luxury housing is the main reason that the majority of new developments you see on the market are high-end. This is due to the increasing cost of construction work. Construction labor demand is at an all-time high, and the price of building materials is at the highest they've ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or affordable buildings." It costs the same." As a result of high cost of labor and materials, and the rise in the value of raw land developers are required to construct luxury homes due to the fact that the numbers do not work to build anything else. To ensure affordable housing cities are enforcing rules that require developers to incorporate affordable units in new construction projects. Typically between 10%-20% depending on the number of units and location. But, on their own, these rules will not provide a meaningful increase in the number of affordable housing.

What are the alternatives to affordable housing? Website.

Throughout the decades there has been building booms and busts. You will find many apartments built between 1970 and 90 in various cities across the United States. Although these homes may appear outdated compared to what's being built nowadays however, they're "bones" are in good shape. The buildings built during this time were built using the most modern materials and techniques. They typically need only surface repairs and wear items can be replaced. These communities and the secondary markets they serve are well placed to counteract the overflow of luxurious homes. They also provide affordable housing. The benefit of these Class B properties is that they generally are able to perform well across all economic climates. When the economy is thriving Class C tenants are able to are able to move into Class B properties . When the economy is in decline, Class A tenants can find it difficult to justify the extravagant rents and typically move down to class B properties. Investors are able to purchase these properties at a fraction of the price of construction and can thus offer a wonderful home, but ensure that rents remain affordable for tenants with different income ranges.
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