CNBC issued a report this week that said that the multifamily real estate sector is facing an "acute crisis". According to the article, the market's luxury end is overcrowded and susceptible to market corrections or flattening. In actuality, apartment developers in the 150 largest US cities built 395,775 new housing units last year, which is an increase of 46% year-over-year. The majority of the new housing units are luxury communities. ,Website.

I've witnessed many large developments being built at a rapid pace while living in Boston over the last few years. As a result, the overwhelming majority of these properties are high-end luxury apartments which the average citizen are unable to afford. In fact there is a reason why the Spotlight Team at the Boston Globe recently published a number of articles that focused on creation of the "Seaport" neighborhood. The article highlighted its lack of affordable housing, as well as an overabundance of luxury housing which does not serve the diverse population within the city.

Do these multifamily developments pose danger to the multifamily industry? The danger 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 a luxury boom 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 rising demand for luxury apartments. Millennials and empty-nester baby boomers are flocking to city centers such as Boston, Austin & Denver with a desire for luxury finishes and luxurious buildings. The rise in popularity is due to the fact that empty nesters and double-income millennial households prefer renting rather than purchase. Facilities like top-of-the-line fitness centers, concierge services and fully-service pet spas are becoming standard. It seems like there is an appalling number of amenities offered with each new building. Modern facilities are being integrated into development projects at a rapid pace however, it's not cheap.

New Construction is Cost Prohibitive

The main reason why the majority of new developments that are on the market are expensive. This is due to the increasing cost of construction work. Construction labor demand is at an all-time high and the cost of building materials is at the highest they've ever been. Toby Bozzuto is the CEO of the Bozzuto Group. He says, "The two-by four doesn't need to be in high-end buildings or affordable buildings." It's the same cost. It's the same." To make sure that affordable housing is available, cities are enforcing regulations which require developers to build affordable units in construction plans. The typical range is between 10 and 20%, based on the number of units and location. This will not cause an increase in housing for the poor.

If Affordable Housing Can't Be Built, What is the alternative? Going here.

Throughout the decades there have been building booms and busts. You will find many apartments built between 1970 and 90 in various markets across the United States. While they may seem outdated compared to current construction however, the "bonesare still in good condition. These buildings were built using the most modern techniques and materials. They typically only require surface rehabilitation and wear items can be repaired. These communities and the secondary markets they serve are well-positioned to counteract the overflow of luxury apartment buildings. They also offer affordable housing. The Class B homes can thrive in any economic environment. When the economy is strong Class C tenants can shift to Class B homes. If the economy is struggling, Class A tenants can no longer justify the luxury rents and are typically forced to move to Class B properties. Investors can typically purchase these properties at a fraction of the cost of building and can thus provide a comfortable place to live yet still ensure that rents remain at a level attractive to tenants of many income ranges.
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