In the last week, CNBC published an article which suggested that "There is an urgent crisis coming our way" within the multifamily real estate market. According to the article 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 during the fiscal year. This represents an increase of 46% compared to previous years. In these new units of housing, about 75-80% of them are considered to be luxury communities. ,Learn more.

While living in Boston over the past few years, I have witnessed numerous major developments being constructed at an incredibly rapid pace. The majority of these properties are luxury homes that the majority of people are unable to afford. The Boston Globe's Spotlight Team recently published a series of articles on the progress of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing and the overabundance luxury housing that don't meet the needs of the diverse population of the city.

Are these multifamily developments an imminent threat to the multifamily industry? If the market is flat it could be a problem of a collapse for Class A new construction. However the existing Class B & C multifamily communities can withstand market volatility and market imbalances. Let's go through why there has been such an unprecedented growth in the luxury market and what happens if demand subsides.

Demand for luxury is on the rise

There are two important factors that drive the rising demand for luxury apartments. Millennials and empty-nester baby boomers are flocking to city centers like Boston, Austin & Denver with a keen interest in high-end finishes and amenity-packed buildings. One reason for this boom is that lots of double-income millennial households and empty nesters with the money to buy are opting to rent. Facilities like top-of-the-line fitness centers, concierge services, and pet spas that are full-service are now the norm. It seems like there is an inordinate number of amenities offered with every new construction. Developers are actively incorporating modern amenities into their projects; however they're not at a cost.

The cost of construction can be expensive.

The main reason why the overwhelming majority of new housing complexes you see coming on the market are expensive is because of the rising costs of construction labor and building materials. Construction is a high-demand industry and the materials are at their most expensive ever. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxury structure or in a low-cost construction. It's the same cost. It costs the same." Cities are being forced to adopt regulations to force developers to construct an amount of affordable units within their new construction projects. Most often, between 10% and 20% based on the number of units and location. The regulations won't lead to an increase in housing for the poor.

What are the alternatives to affordable housing? Website.

Over the past few decades, there have been building booms and busts. There are many apartments built between 1970 and 90 in various markets across the nation. While they may seem out-of-date compared to the current construction, the "bonesare still in good condition. Built during this period were constructed using advanced materials and techniques. They generally just require minor repairs, and wear items can be replaced. These communities, as well as the secondary markets they're in, are positioned well to take on the flood of luxury new homes and to maintain housing that's fairly affordable. The great thing about these Class B homes is that they generally are able to perform well in all economic climates. When the economy is thriving Class C tenants are able to shift to Class B properties When the economy is struggling the Class A tenants will not afford the high rents, and they typically shift to more affordable class B properties. They are typically available for less than the price of construction. This permits investors to provide a great location to live in while still offering appealing rents that tenants of different income levels can afford.
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