CNBC released a report last week that stated that the multifamily realty market is in the midst of an "acute crisis". The article concludes that the upper end of the luxury market is over-built and prone to flattening or a market correction. In fact, apartment developers in the 150 largest US cities built 395,775 new housing units in the last year, which represents an increase of 46% year-over-year. About 75-80% of these new units of housing are luxurious communities. ,Visit.

In my time in Boston in the last few years, I have witnessed many major developments being built in a rapid manner. Not surprisingly, the overwhelming majority of these are high-end luxury apartments which the average citizen can't afford. In reality there is a reason why the Spotlight Team at the Boston Globe recently published a series of pieces that focused on the development of the new "Seaport" neighborhood. The article pointed out the absence of affordable housing as well as the overabundance of luxury homes that do not meet the needs of the diverse population of the city.

With the advent of all of these new luxury multifamily properties, does this put the entire multifamily market at risk of collapse or flattening? The threat to Class A new construction is obvious if the market flattens but the existing Class B & C multifamily communities are well-positioned to withstand market imbalances and corrections. Let's examine the causes of this luxury boom and what happens if the boom comes to an end.

The demand for luxury goods is high.

There are two major factors driving the demand for luxury apartments. Baby boomers and empty nesters are moving into cities like Boston, Austin & Denver with a discerning taste for luxurious finishes and amenities-packed buildings. The rise in popularity can be attributed to the trend that empty nesters and households with double incomes are choosing to rent rather than buy. Facilities like top-of-the-line gyms, concierge services and fully-service pet spas are becoming standard. There is an appalling number of amenities offered with every new construction. Developers are aggressively incorporating these modern perks into their projects; however it's not inexpensively.

New construction is expensive

Luxury housing is the main reason for the fact that most developments on the market are high-end. This is due to the rising cost of construction work. Construction labor demand is at an all-time high and the cost of 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 costs the same." As a result of high cost of labor and materials, and the appreciation of the raw land developers are being required to construct luxury homes due to the fact that the numbers do not make sense to construct 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 within their new construction projects. The typical range is between 10 and 20%, based on the number of units and the location. The regulations won't cause an increase in housing for the poor.

If Affordable Housing isn't Built, what is the Alternative? Click here.

Throughout the decades there have been several building booms and busts. In numerous markets across the country, you'll see a lot of apartments constructed between the 1970's-1990's. While these properties may feel very out of date in comparison to the modern buildings being constructed today, they're "bones" are quite good. The buildings built in the frame were constructed using contemporary materials and techniques, and generally only require surface rehabilitation with the replacement of wear and tear items. These communities and their secondary markets are well-positioned to counter the influx of luxurious apartments. They also provide affordable housing. These Class B properties can succeed in any economic situation. If the economy is robust, Class C tenants are able to move into Class B homes. When the economy is in decline, tenants of Class A are forced to move down to Class B properties. These homes are usually available for less than the 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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