CNBC issued a report this week that stated that the multifamily realty sector is experiencing an "acute crisis". The article concludes that the upper end of the market for luxury is overbuilt and vulnerable to a flattening or a market correction. Apartment developers in the top 150 US towns built 395 775 housing units during the financial year. This represents a 46% increase over the previous year. The majority of the new units of housing are luxurious communities. ,Going here.

I've witnessed many large development projects being constructed at an incredible pace while living in Boston over the last few years. It's not surprising that the vast majority of these homes are luxurious luxury residences that your average citizens can't afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing, as well as the inordinate supply of luxury homes that don't meet the needs of its diverse population.

Are these multifamily developments danger to the multifamily market? If the market slows down it could be a problem for Class A new construction. However the existing Class B & C multifamily communities are able to withstand market corrections and imbalances. Let's look at the reasons the reasons behind why there's been a luxury boom and what will happen when demand slows.

Luxury Demand is Strong

There are two main drivers for the rising demand for luxurious apartments. Baby boomers and empty nesters are descending on city centers such as Boston, Austin & Denver with a desire for luxurious finishes and amenities-packed properties. One specific reason to this increase is that a lot of double-income households of millennials and empty nesters that can afford to purchase are choosing to rent. Perks such as high-end gyms, concierge services, and fully-service pet spas are becoming standard. With each new building there is a sense that there's an arms race. These kinds of modern facilities are being integrated into the projects of developers rapidly, but it isn't cheap.

New Construction is Cost Prohibitive

Luxury housing is the main reason why the majority of new developments that are in the marketplace are of high-end quality. This is because of the growing cost of construction labor. Construction labor is in high demand and materials are at their highest price ever. As 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 building. It's the same price. It's the same." Cities are forced to pass regulations to force developers to build a certain number of affordable units in their new construction projects. Most often, between 10% and 20% based on the number of units and the location. These regulations will not result in an increase in affordable housing.

What alternatives are there to affordable housing? Read more.

There have been numerous boom and bust cycles within the building industry throughout the decades. In many markets around the country, you will notice large numbers of apartments constructed between the 1970's-1990's. Although they may seem very out of date when compared to the buildings that are being built today, the "bones" are quite good. The buildings built during this time were built using the most advanced materials and techniques. They typically just require minor repairs, and wear and tear items can be repaired. These communities and their secondary markets are well-positioned to offset the flood of luxury homes. They also offer affordable housing. The Class B homes can perform in any economic climate. If the economy is flourishing Class C tenants are able to are able to move into Class B properties . When the economy is suffering the Class A tenants will no longer justify the luxury rents and typically move down to more affordable class B properties. Investors can typically purchase these properties at less than the cost of building and can thus provide a great home, but ensure that rents remain at a level attractive to tenants of many income levels.
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