This past week, CNBC published an article in which they claimed that "There is an urgent crisis coming towards us" within the multifamily real estate sector. According to the report the upper-end of the luxury market is too crowded and vulnerable to market corrections or flattening. Developers of apartments in the 150 largest US towns delivered 395 775 housing units last fiscal year. This represents an increase of 46% over the previous year. In these new homes, around 75-80% of them are considered to be luxury communities. ,Read this.

I've seen many major development projects being constructed at an incredible pace while living in Boston in recent years. As a result, the overwhelming majority of these homes are luxury homes that your average citizens can't 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 shortage of affordable housing as well as the overabundance luxury housing that doesn't cater to its diverse population.

With the arrival of all these new luxury multifamily properties is this putting the entire multifamily industry at risk of flattening or collapse? The risk to Class A new construction is apparent if the market flattens but the existing Class B & C multifamily communities are well-positioned to stand up to market imbalances and corrections. Let's take a look at the motives for this luxury boom, and what happens if it comes to an end.

The demand for luxury goods is high.

There are two main reasons of the growing demand for luxurious apartments. Generation Y and empty nester baby boomers are making their way to cities like Boston, Austin, and Denver, with a taste for luxury finishes and amenities-packed buildings. One reason for this boom is that many double income households of millennials and empty nesters that can afford to buy are opting to rent. Benefits like high-end gyms, concierge services and pet spas that are full-service are becoming standard. There is an inordinate number of amenities offered with every new construction. Modern facilities are being integrated into developers' projects at a rapid pace, but it isn't cheap.

New construction is expensive

Luxury housing is the main reason why the majority of new developments you see on the market are high-end. This is due to the increasing costs of construction labor. Construction labor is highly sought-after and the materials are at their highest ever price. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't need to be in high-end buildings or low-cost ones." It's the same price. It costs the identical." To provide affordable housing cities are enforcing rules that require developers to include affordable units in their construction plans. The typical range is between 10 and 20%, based on the number of units and location. However, these regulations alone will not provide a meaningful increase in the amount of affordable housing.

What alternatives are there to housing that is affordable? Learn more.

Over the past few decades, there has been building boom and bust cycles. In many areas across the country, you'll see a lot of apartments constructed between the 1970's-1990's. While these homes may appear old-fashioned compared to modern construction however, the "bonesare still in good condition. These buildings were built using the most modern techniques and materials. They typically only require surface rehabilitation and wear-related items are able to be repaired. These apartment communities, and the secondary markets they're located in are well-positioned to counterbalance the flood of luxury new homes and to maintain housing that's fairly affordable. The Class B homes are able to thrive in any economic environment. If the economy is flourishing Class C tenants are able to move up into Class B properties When the economy is struggling the Class A tenants will no longer justify the luxury rents and typically move down to more affordable class B properties. Investors are able to purchase these properties for less than the cost to build they can provide a comfortable place to live yet still ensure that rents remain affordable for tenants with different income ranges.
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