The week before, CNBC published an article suggesting that "There is a crisis of extreme proportions that is coming our way" in the multifamily real estate sector. According to the report the market's luxury end is too crowded and vulnerable to market fluctuations or flattening. In fact, apartment developers in the top 150 US cities constructed 395,775 brand new housing units last year, which represents an increase of 46% year-over-year. Nearly 75-80% of these new units of housing are luxurious communities. ,Learn more.

I've seen many major development projects being constructed at an incredible pace during my time in Boston over the last few years. It's not surprising that the vast majority of these properties are high-end luxury apartments which the average citizen are unable to afford. In actuality there is a reason why the Spotlight Team at the Boston Globe recently published a number of articles that focused on the growth of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing and the inordinate supply of luxury homes which doesn't accommodate the diverse population of the city.

With the emergence of all these new multi-family luxury properties, does this put the entire multifamily sector at risk of collapse or flattening? The threat to Class A new construction is apparent if the market flattens, however; existing Class B & C multifamily communities are well-positioned to withstand market imbalances as well as corrections. Let's look at the reasons the reasons behind why there's been a luxury boom and what will happen in the event that demand declines.

Luxury Demand is Strong

There are a couple of key drivers behind the rising demand for luxury apartments. Generation Y and baby boomers who are empty-nesters are moving into cities such as Boston, Austin & Denver with a keen interest in luxurious finishes and amenities-packed properties. One specific reason to this increase is that a lot of double-income households of millennials and empty nesters that can afford to purchase are choosing to rent. Benefits like high-end fitness centers, concierge services, and fully-service pet spas are now the norm. With every new development, it seems as though there is an amenities arms race. These types of modern amenities are being included in development projects at a rapid pace, but it isn't cheap.

The cost of construction can be expensive.

Luxury housing is the main reason why the majority of new developments that are in the marketplace are of high-end quality. This is due to the rising cost of construction labor. Construction labor is in high demand and the materials are at their highest price ever. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't care if it's in luxury buildings or low-cost ones." It's priced the same." As a result of high prices for labor and materials as well as the rise in the value of raw land, developers are required to construct luxury homes because the numbers simply don't work to build any other type of construction. Cities are forced to pass rules that require developers to create the right amount of affordable homes within their construction projects. The average unit count and the location will determine much they will charge. But these rules alone do not guarantee a significant growth in affordable housing.

If Affordable Housing isn't Constructed, What's the alternative? Find out more.

Throughout the decades there has been building boom and bust cycles. You will find many apartments built between 1970 and 1990 in various cities across the United States. Although these homes may appear outdated when compared to the buildings that are being built today however, the "bones" are quite good. These buildings constructed in the frame have been constructed with modern materials and techniques and generally only require surface rehabilitation and wear-related items replaced. These communities, as well as the secondary markets that they're in are strategically placed to take on the flood of luxury new homes and provide housing that's relatively affordable. The benefit of these Class B homes is that they typically are able to perform well in all economic climates. When the economy is thriving Class C tenants are able to move up into Class B properties . When the economy is in decline the Class A tenants will find it difficult to justify the extravagant rents, and they typically shift to more affordable Class B properties. These homes are usually accessible for less than price of construction. This allows investors to offer an ideal property to live in and yet still pay appealing rents that tenants of different incomes are able to afford.
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