CNBC released a report last week that said that the multifamily realty sector is facing an "acute crisis". The article concludes that the upper tier of the market for luxury is over-built and prone to a flattening or market correction. In reality, apartment builders in the top 150 US cities delivered 395,775 new housing units in the last year, which is an increase of 46% Y-o-Y. Nearly 75-80% of these new housing units are luxury communities. ,Click here.

While living in Boston in the last few years, I've seen many major developments being built at a breakneck speed. As a result, the overwhelming majority of these homes are luxurious luxury residences which the average citizen cannot afford. In reality, the Spotlight Team at the Boston Globe recently published a series of articles that focused on development of the new "Seaport" neighborhood. The article highlighted the city's deficiency of affordable housing as well as the overabundance luxury housing that doesn't cater to the diverse population of the city.

With the advent of all of these new luxurious multifamily homes is this putting the entire multifamily sector at risk of a collapse or flattening? If the market slows down and the risk of collapse increases, it is of a collapse for Class A new construction. However, the existing Class B & C multifamily communities can stand up to market volatility and market imbalances. Let's look at the reasons why there has been such an unprecedented growth in the luxury market and what could happen in the event that demand declines.

Demand for luxury is on the rise

There are two major reasons for the rising demand for luxurious apartments. Generation Y and baby boomers who are empty-nesters are moving into cities such as Boston, Austin & Denver with a discerning taste for luxury finishes and luxurious properties. This growth is due to the fact that empty nesters and double-income millennial households prefer renting rather than purchase. Perks such as high-end fitness centers, concierge services and fully-service pet spas are becoming the standard. There's an astonishing amount of amenities being offered in every new building. Developers are aggressively incorporating these types of modern perks into their plans, but, it doesn't come inexpensively.

Construction costs are high for new construction.

The main reason why the majority of new developments you see in the marketplace are of high-end quality. This is because of the rising costs of construction labor. Construction labor is in high demand and materials are at their most expensive ever. Toby Bozzuto is the CEO of Bozzuto Group. He says, "The two-by four doesn't need to be in high-end structures or in affordable ones." It's priced the same." Because of the high cost of labor and materials, and the rising value of the raw land, developers are obliged to build luxurious products due to the fact that the numbers do not allow for building anything else. To make sure that affordable housing is available cities are now enforcing laws which require developers to build affordable units in their construction plans. The average unit count and the location determines how the developers will be able to charge. This will not cause an increase in housing for the poor.

What are the alternatives for affordable housing? Learn more.

There have been many cycles of boom and bust within the building industry over the years. In numerous markets across the country, you'll notice large numbers of apartment buildings built in the 1970's and the 1990's. Although these homes may appear very out of date compared to what's being built today, they're "bones" are good. These buildings constructed in the frame were built with modern techniques and materials. They 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 homes being built and to maintain housing that's fairly affordable. The best part about Class B homes is that they typically are able to perform well across all economic climates. When the economy is thriving Class C tenants can 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 they typically shift to class B properties. These homes are usually offered for less than the price of construction. This permits investors to provide an ideal location to live in while still offering attractive rents that tenants of different income levels can afford.
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