In the last week, CNBC published an article suggesting that "There is an acute crisis headed towards us" in the multifamily real estate sector. According to the article the upper-end of the luxury market is overcrowded and susceptible to market corrections or flattening. Developers of apartments in the top 150 US towns built 395 775 housing units during the financial year. This is a 46% increase over the previous year. About 75-80% of these new housing units are high-end communities. ,Discover more.

I've seen a lot of major developments built at breakneck speed while living in Boston for the past few years. Not surprisingly, the overwhelming majority of these properties are luxury homes which the average citizen 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 that don't meet the needs of the diverse population of the city.

With the emergence of all these luxurious multifamily homes, does this put the entire multifamily market at risk of a flattening or even a collapse? If the market flattens, there is a risk for Class A new construction. However, existing Class B & C multifamily communities can stand up to market fluctuations and imbalances. Let's go through the reasons behind why there's been a luxury boom and what will happen if demand subsides.

The demand for luxury goods is strong

There are two important factors that drive the demand for luxury apartments. Millennials and empty-nester baby boomers are flocking to city centers such as Boston, Austin & Denver with a desire for high-end finishes and amenity-packed buildings. This boom is due to the trend that empty nesters and households with double incomes are choosing to rent rather than buy. Benefits like high-end fitness centers, concierge services and pet spas that are full-service are becoming the standard. It seems like there is an inordinate quantity of amenities available in every new building. These types of modern facilities are being integrated into the projects of developers in a fast-paced manner, but it isn't cheap.

Construction costs are high for new construction.

The reason the majority of new housing complexes you see coming on the market are expensive is because of the ever-rising price of construction labor and building materials. Construction labor demand is at an all-time high, as is the price of building materials is at their highest ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxury building or in a budget-friendly construction. It's the same price. Because of the high cost of labor and materials, and the rising value of the raw land developers are obliged to build luxurious products due to the fact that the numbers do not work to build any other kind of building. To ensure affordable housing, cities are enforcing regulations that require developers to incorporate affordable units within their new construction projects. The average unit count and the location will determine the developers will be able to charge. The regulations won't result in an increase in affordable housing.

What are the alternatives to housing that is affordable? Web site.

There have been numerous cycles of boom and bust in the construction industry over the years. In many markets around the country, you will see a lot of apartments constructed between the 1970's and 1990's. Although they may seem very out of date compared to what's being built in the present however, they're "bones" are good. The buildings built in the frame were constructed using modern materials and techniques and generally only require surface rehabilitation with wear items replaced. These communities, as well as the secondary markets they're located in are strategically placed to counterbalance the flood of luxury new homes and provide housing that's fairly affordable. The best part about Class B homes is that they generally excel regardless of the economic conditions. When the economy is thriving, Class C tenants are able to move into Class B properties When the economy is suffering, Class A tenants can find it difficult to justify the extravagant rents and typically move down to more affordable class B properties. Investors can typically purchase these properties for less than the cost to build and can thus offer a wonderful living space, yet keep the rents at a level attractive to tenants with varying income ranges.
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