CNBC released a report last week stating that the multifamily realty sector is in the midst of an "acute crisis". According to the article the luxury market's upper end is crowded and prone to market declines or flattening. Developers of apartments in the 150 largest US towns delivered 395 775 housing units during the fiscal year. This represents an increase of 46% compared to the previous year. Of these new housing units, nearly 75-80% of them are considered luxury communities. ,Visit website.

I've witnessed many large 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 that your average citizens can't afford. In reality there is a reason why the Spotlight Team at the Boston Globe recently released a set of articles that focused on development of the new "Seaport" neighborhood. The article highlighted the lack of affordable housing as well as an abundance of luxury houses that do not meet the needs of the diverse population within the city.

With the emergence of all these new luxury multifamily properties could this put the entire multifamily market at risk of collapse or flattening? The threat to Class A new construction is evident if the market is flat but the existing Class B & C multifamily communities are uniquely positioned to withstand market imbalances and corrections. Let's examine why there has been such an increase in luxury and what happens when demand slows.

The demand for luxury goods is high.

There are two major reasons for the rising demand for luxury apartment. Generation Y and empty nester baby boomers are making their way to cities such as Boston and Austin as well as Denver with a discerning palate for luxury finishes and amenities-packed structures. The rise in popularity is due to the reality that empty-nesters and double-income millennial households prefer renting rather than purchase. Luxury gyms, concierge service and full-service spas for pet owners are now commonplace. There's an astonishing quantity of amenities available with every new construction. Developers are aggressively incorporating modern amenities into their plans, but, it doesn't come cheap.

New construction is expensive.

The main reason that the majority of new developments that are in the marketplace are of high-end quality. This is due to the increasing cost of construction work. The demand for construction work is at an all-time high, as is the price of building materials is the most they have ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four doesn't care whether it's in a luxurious building or in an affordable structure. It's the same price." Because of the high cost of labor and materials, and the appreciation of the raw land developers are forced to build luxury products due to the fact that the numbers do not allow for building any other type of construction. To ensure affordable housing cities are enforcing rules that require developers to include affordable units within their construction plans. Typically between 10%-20% depending on unit count and location. But these rules alone do not guarantee a significant growth in affordable housing.

If Affordable Housing isn't Constructed, What's the Alternative? Get more info.

There have been numerous boom and bust cycles within the building industry over the years. There are many apartments built between 1970 and 90 in various cities across the nation. Although these homes may appear outdated when compared to the buildings that are being built today but the "bones" are quite good. Buildings built during this time frame were built with modern materials and techniques and generally only require surface rehabilitation and wear-related items replaced. These communities and the secondary markets they serve are well-positioned to counter the influx of luxurious homes. They also provide affordable housing. The Class B homes can succeed in any economic situation. If the economy is robust Class C tenants can move into Class B properties. When the economy is struggling tenants of Class A are forced to move down to Class B homes. They are typically offered for less than the cost of building. This lets investors offer an ideal location to live in and still maintain appealing rents that tenants of different income levels can afford.
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