In the last week, CNBC published an article suggesting that "There is an urgent crisis that is coming towards us" in the multifamily real estate market. The article surmises that the upper end of the luxury market is overbuilt and susceptible to a flattening or market correction. In fact, apartment developers in the top 150 US cities constructed 395,775 brand new housing units in the last year, which marks an increase of 46% year-over-year. Nearly 75-80% of these new units of housing are luxury communities. ,Homepage.

I've seen a lot of major developments built at breakneck speed when I lived in Boston for the past few years. Most of these homes are expensive luxury apartments which the majority of people 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 don't meet the needs of its diverse population.

With the emergence of all these multi-family luxury properties, does this put the entire multifamily market at risk of flattening or collapse? If the market slows down, there is a risk for Class A new construction. However, the existing Class B & C multifamily communities can stand up to market volatility and market imbalances. Let's examine why there has been such an increase in luxury and what could happen if demand subsides.

Demand for luxury is on the rise

There are two important factors that drive the increasing demand for luxury homes. Millennials and empty nester baby boomers are moving into cities like Boston Austin, Boston, and Denver, with a taste for luxury finishes and amenities-packed buildings. This boom is due to the reality that empty-nesters and double-income millennial households are choosing to rent rather than buy. Perks such as high-end fitness centers, concierge services, and fully-service pet spas are becoming standard. Every time a new construction is completed there is a sense that there is an amenities arms race. These kinds of modern facilities are being integrated into the projects of developers rapidly, but it isn't cheap.

Construction costs are high for new construction.

The main reason why the overwhelming majority of new residential developments being put up for sale is luxurious is because of the increasing costs of construction materials and labor. The demand for construction work is at an all-time high, and the cost of building materials is at their highest ever been. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or affordable buildings." It's priced the same." As a result of high prices for labor and materials as well as the rising value of the natural resources developers are being obliged to build luxurious products since the numbers don't work to build anything else. Cities are being forced to adopt regulations to force developers to create an amount of affordable units in their construction projects. The number of units and the location will determine how the developers will be able to charge. However, these regulations alone won't result in a significant increase in the number of affordable housing.

What alternatives are there to affordable housing? Visit.

There have been numerous cycles of boom and bust in the construction industry over the decades. In many areas across the country, you will notice large numbers of apartments constructed between the 1970's-1990's. Although these homes may appear old-fashioned compared to what's being built nowadays, they're "bones" are in good shape. The buildings built during this time were built using the most advanced materials and techniques. They generally need only surface repairs and wear-related items are able to be repaired. These communities, as well as the secondary markets they serve are well-positioned to offset the flood of luxurious homes. They also provide affordable housing. These Class B properties are able to succeed in any economic situation. When the economy is strong, Class C tenants are able to move into Class B properties When the economy is in decline and Class A tenants are unable to find it difficult to justify the extravagant rents and typically move down to more affordable class B properties. They are typically available for less than the cost of building. This permits investors to provide an ideal location to live in while still offering attractive rents that tenants with different incomes can afford.
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