CNBC issued a report this week that stated that the multifamily real estate sector is facing an "acute crisis". The article surmises that the top end of the market for luxury is overbuilt and susceptible to a flattening or a market correction. Apartment developers in the top 150 US towns delivered 395 775 new housing units last fiscal year. This is an increase of 46% compared to the previous year. About 75-80% of these new homes are in luxury communities. ,Click this link.

I've seen many major developments being built at a rapid pace during my time in Boston over the last few years. The majority of these properties are luxury homes that most people cannot 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 as well as the overabundance luxury housing which doesn't accommodate its diverse population.

With the emergence of all these new luxurious multifamily homes is this putting the entire multifamily industry at risk of collapse or flattening? The threat of Class A new construction is apparent if the market flattens, however; the existing Class B & C multifamily communities are well-positioned to withstand market imbalances and corrections. Let's look at the reasons for this boom in luxury, and what will happen if it is over.

The Demand for Luxury is High

There are a couple of important factors that drive the demand for luxury apartments. Baby boomers are moving to cities such as Boston and Austin as well as Denver, with a taste for luxurious finishes and amenities-packed buildings. One specific reason for this boom is that a lot of double-income households, as well as empty nesters that can afford to buy are choosing to rent. Luxury gyms, concierge service and spas with full-services for pets are becoming more the norm. It seems like there is an inordinate quantity of amenities available with every new construction. Modern amenities are being included in development projects at a rapid pace, but it isn't cheap.

The cost of construction can be expensive.

The main reason why the majority of developments on the market are expensive. This is due to the increasing costs of construction labor. Construction is a high-demand industry and materials are priced 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 structures or in affordable ones." It's exactly the same price. It costs the identical." To provide affordable housing cities are now enforcing laws that require developers to include affordable units in construction plans. Typically between 10%-20% depending on the number of units and location. However, these regulations alone won't result in a significant increase in the amount of affordable housing.

If Affordable Housing isn't Constructed, What's the Alternative? Visit here.

There have been many cycles of boom and bust in the building industry throughout the years. You will find many apartments constructed between 1970 and 1990 in various cities across the nation. Although these properties might seem out-of-date compared to the current construction but the "bonesare still in good condition. The buildings built during this time were built using the most advanced materials and techniques. They generally need only surface repairs and wear-related items are able to be repaired. These apartment communities, and the secondary markets that they're in are well-positioned to counterbalance the flood of luxury homes being built and provide housing that's relatively affordable. The best part about Class B properties is that they generally perform well across all economic climates. When the economy is strong Class C tenants are able to move up into Class B properties . When the economy is in decline, Class A tenants can no longer justify the luxury rents and typically move down to Class B properties. Investors can usually purchase these properties for only a small portion of the price of construction they can provide a great place to live yet still maintain rents affordable to tenants with varying income levels.
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