CNBC released a report last week stating that the multifamily realty market is facing an "acute crisis". The article concludes that the upper tier of the luxury market is over-built and prone to flattening or a market correction. Apartment developers in the 150 largest US towns delivered 395 775 housing units in the last fiscal year. This is an increase of 46% over the previous year. Nearly 75-80% of these new housing units are luxury communities. ,Website.

I've seen a lot of major developments being built at a rapid pace while living in Boston over the last few years. The majority of these properties are expensive luxury apartments that the majority of people are unable to afford. In fact it was the Spotlight Team at the Boston Globe recently published a series of pieces that focused on the development of the new "Seaport" neighborhood. The article highlighted the lack of affordable housing as well as the overabundance of luxury homes that does not cater to the diverse population of the city.

With the arrival of all of these new multi-family luxury properties, does this put the entire multifamily industry at risk of a flattening or even a collapse? The danger of Class A new construction is evident if the market is flat, however; the existing Class B & C multifamily communities are uniquely placed to stand up to market imbalances and corrections. Let's look at the reasons for this boom in luxury, and what happens if the boom comes to an end.

The demand for luxury goods is high.

There are two major reasons of the growing demand for luxury apartment. Baby boomers and empty nesters are moving into cities like Boston, Austin & Denver with a discerning taste for luxurious finishes and amenities-packed properties. This boom is due to the trend that empty nesters and households with double incomes prefer renting rather than purchase. Perks such as high-end fitness centers, concierge services and full-service pet spas are becoming standard. With every new development there is a sense that there's an arms race. These types of modern facilities are being integrated into the projects of developers in a fast-paced manner, but it isn't cheap.

New Construction is costly.

The primary reason for the majority of new housing complexes you see coming on the market are luxurious is because of the increasing costs of construction materials and labor. The demand for construction work is at an all-time high, as is the cost of 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 structure or in an affordable construction. It's the same price." It costs the identical." Cities are forced to pass rules that require developers to construct the right amount of affordable units within their new construction projects. Typically between 10%-20% depending on the number of units and location. But these rules alone do not guarantee a significant increase in the amount of affordable housing.

What are the alternatives to affordable housing? Learn more.

Through the years, there have been several building booms and busts. In many markets around the country, you will find a large number of homes built between the 1970's and the 1990's. While these homes may appear outdated compared to current construction, the "bonesremain in good shape. Built during this period were constructed using modern techniques and materials. They generally need only surface repairs and wear and tear items can be repaired. These communities as well as their secondary markets are well-positioned to counter the influx of luxurious homes. They also provide affordable housing. The Class B homes are able to perform in any economic climate. If the economy is flourishing, Class C tenants shift to Class B homes. If the economy is in decline, Class A tenants can not afford the high rents, and they typically shift to Class B properties. Investors can typically purchase these properties for only a small portion of the cost of building, which allows them to provide a comfortable home, but ensure that rents remain at a level attractive for tenants with different income levels.
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