CNBC released a report last week stating that the multifamily realty sector is in the midst of an "acute crisis". The article surmises that the upper end of the luxury market is overbuilt and susceptible to flattening or a market correction. Developers of apartments in the largest 150 US towns constructed 395 775 housing units during the fiscal year. This represents an increase of 46% compared to previous years. About 75-80% of these new housing units are luxury communities. ,Website.

When I lived in Boston during the last couple of years, I have witnessed numerous major developments being constructed in a rapid manner. As a result, the overwhelming majority of these are luxurious luxury residences that the average person are unable to afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing and the excess of luxury housing that doesn't cater to the diverse population of the city.

With the emergence of all these new luxurious multifamily homes is this putting the entire multifamily market at risk of collapse or flattening? The risk to Class A new construction is obvious if the market flattens but existing Class B & C multifamily communities are well-positioned to withstand market imbalances as well as corrections. Let's look at the reasons for this boom in luxury, and what happens if it comes to an end.

The demand for luxury goods is strong

There are two main drivers for the rising demand for luxury apartments. Baby boomers are moving to cities like Boston Austin, Boston, and Denver, with a taste for high-end finishes and luxurious properties. The rise in popularity is due to the trend that empty nesters and double-income millennial households prefer renting rather than buy. Luxury gyms, concierge service and full-service spas for pets are becoming more the norm. It seems like there is an astonishing quantity of amenities available in every new building. These kinds of modern amenities are being incorporated into developers' projects at a rapid pace and aren't cheap.

New Construction is Cost Prohibitive

The primary reason for the vast majority of the new housing complexes you see coming on the market are expensive is because of the rising price of construction labor and building materials. Construction labor is highly sought-after and the materials are at their highest price ever. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxurious building or in an affordable structure. It costs the same." It's the identical." Cities are being forced to adopt regulations to force developers to build a certain number of affordable units in their construction projects. The average number of units as well as the location determines how much they will charge. This will not cause an increase in the number of affordable homes.

If Affordable Housing Isn't Constructed, What's the Alternative? Read more.

There have been numerous cycles of boom and bust in the construction industry over the decades. There are many apartment buildings built between 1970 and 1990 in various cities across the nation. While they may seem old-fashioned compared to modern construction but the "bones” are still good. Built during this period were constructed using advanced materials and techniques. They generally need only surface repairs and wear items can be replaced. These communities, as well as their secondary markets are well-positioned to counteract the overflow of luxury homes. They also offer affordable housing. The Class B homes can perform in any economic climate. When the economy is thriving Class C tenants can are able to move into Class B homes. If the economy is in decline the Class A tenants will no longer justify the luxury rents, and they typically shift to class B properties. These homes are usually available for less than the price of construction. This lets investors offer the perfect place to call home and yet still pay appealing rents that tenants of different income levels can afford.
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