CNBC published a report this week stating that the multifamily real estate sector is experiencing an "acute crisis". The article suggests that the upper end of the market for luxury is over-built and prone to a flattening or a market correction. Developers of apartments in the 150 largest US towns built 395 775 new housing units in the last fiscal year. This represents an increase of 46% compared to previous years. Of these new housing units, nearly 75-80% of them are classified as luxury communities. ,Homepage.

When I lived in Boston in the last few years, I've seen many major developments being built at a breakneck speed. Most of these homes are expensive luxury apartments that most people cannot afford. In actuality it was the Spotlight Team at the Boston Globe recently published a number of articles that focused on development of the new "Seaport" neighborhood. The article highlighted its 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 advent of all of these new multi-family luxury properties is this putting the entire multifamily market at risk of flattening or collapse? If the market slows down and the risk of collapse increases, it is of a collapse for Class A new construction. However existing Class B & C multifamily communities can stand up to market fluctuations and imbalances. Let's look at the reasons the reasons behind why there's been an increase in luxury and what could happen in the event that demand declines.

The demand for luxury goods is high.

There are a few major factors driving the demand for luxury apartments. Baby boomers and empty nesters are moving into cities such as Boston, Austin & Denver with a desire for luxurious finishes and amenities-packed structures. One reason to this increase is that lots of double-income households of millennials and empty nesters with the money to purchase are choosing to rent. High-end gyms, concierge services and spas with full-services for pets are all becoming regular. Every time a new construction is completed it appears that there is an amenities arms race. Modern amenities are being incorporated into developers' projects at a rapid pace, but it isn't cheap.

New construction is expensive.

High-end housing is the primary reason why the majority of new developments that are on the market are high-end. This is due to the growing costs of construction labor. Construction labor demand is at an all-time high, as is the price of building materials is at the highest they've ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't matter if it's in luxurious structures or in affordable ones." It's exactly the same price. Due to the high cost of cost of labor and materials, and the appreciation of the raw land developers are required to construct luxury homes due to the fact that the numbers do not work to build any other type of construction. Cities are being forced to adopt rules that require developers to build the right amount of affordable homes within their new construction projects. Typically between 10%-20% depending on the unit count and location. But, on their own, these rules will not provide a meaningful increase in the number of affordable housing.

What alternatives are there for affordable housing? Get more info.

Through the years, there has been building boom and bust cycles. In many areas across the country, you will find a large number of apartment buildings built in the 1970's-1990's. While they may seem outdated compared to current construction but the "bonesremain in good shape. Built during this period were constructed using modern techniques and materials. They typically just require minor repairs, and wear-related items are able to be replaced. These communities, as well as the secondary markets that they're in, are positioned well to counterbalance the influx of new luxury apartments and to maintain housing that's reasonably affordable. The Class B homes are able to succeed in any economic situation. If the economy is robust Class C tenants are able to move into Class B properties. When the economy is struggling Class A tenants have to shift to more affordable Class B properties. Investors can usually purchase these properties for less than the cost to build, which allows them to provide a comfortable place to live yet still keep the rents affordable to tenants of many income levels.
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