CNBC issued a report this week stating that the multifamily realty sector is in the midst of an "acute crisis". According to the article, the market's luxury end is overcrowded and susceptible to market corrections or flattening. In reality, apartment builders in the 150 largest US cities built 395,775 new housing units in the last year, which marks an increase of 46% year-over-year. In these new units of housing, about 75-80% of them are classified as luxury communities. ,Discover more.

I've witnessed many large developments being built at a rapid pace during my time in Boston for the past few years. A majority of these developments are expensive luxury apartments which the majority of people can't afford. In actuality, the Spotlight Team at the Boston Globe recently published a series of articles that focused on the creation of the "Seaport" neighborhood. The article highlighted its lack of affordable housing, as well as an overabundance of luxury housing which does not serve the diverse population within the city.

With the advent of all these new luxury multifamily properties is this putting the entire multifamily market at risk of a collapse or flattening? If the market slows down, there is a risk of a collapse for Class A new construction. However, the existing Class B & C multifamily communities are able to withstand market fluctuations and imbalances. Let's go through why there has been such an unprecedented growth in the luxury market and what could happen when demand slows.

The demand for luxury goods is high.

There are two major factors driving the increasing demand for luxury homes. Millennials and empty nester baby boomers are moving into cities like Boston and Austin as well as Denver. They have a keen taste for high-end finishes and luxurious structures. One specific reason for this boom is that a lot of double-income millennial households and empty nesters that can afford to buy are choosing to rent. Perks such as high-end fitness centers, concierge services, and full-service pet spas are now the norm. With every new development there is a sense that there is an amenities arms race. Developers are rushing to incorporate these modern perks into their plans, but they're not at a cost.

Construction costs are high for new construction.

Luxury housing is the main reason why the majority of developments in the marketplace are of high-end quality. This is due to the rising cost of construction work. The demand for construction labor is at an all-time high and the price of building materials is at their highest ever been. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or affordable buildings." It costs the same." Due to the high cost of prices for labor and materials as well as the rising value of the natural resources developers are required to construct luxury homes since the numbers don't allow for building any other type of construction. To make sure that affordable housing is available cities are now enforcing laws that require developers to incorporate affordable units in construction plans. The average unit count and the location will determine the developers will be able to charge. But, on their own, these rules will not provide a meaningful increase in the amount of affordable housing.

What are the alternatives to affordable housing? Learn more.

Through the years, there has been building booms and busts. There are many apartment buildings built between 1970 and 1990 in various markets across the nation. Although they may seem very out of date when compared to the buildings that are being built today but the "bones" are quite good. These buildings constructed in the frame were built with modern materials and techniques and generally only require surface rehabilitation with the replacement of wear and tear items. These communities as well as their secondary markets are well placed to counteract the overflow of luxurious apartment buildings. They also offer affordable housing. These Class B properties are able to succeed in any economic situation. When the economy is thriving, Class C tenants shift to Class B properties . When the economy is struggling, Class A tenants can not afford the high rents and typically move down to Class B properties. These homes are usually accessible for less than cost of building. This allows investors to offer an ideal location to live in and yet still pay attractive rents that tenants with different income levels can afford.
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