In the last week, CNBC published an article which suggested that "There is a crisis of extreme proportions that is coming our way" within the multifamily real estate market. According to the article the market's luxury end is too crowded and vulnerable to market fluctuations or flattening. In fact, apartment developers in the largest 150 US cities delivered 395,775 new housing units last year, which is an increase of 46% year-over-year. In these new homes, around 75-80% of them are considered luxury communities. ,Get more info.

In my time in Boston in the last few years, I've seen several major developments being constructed at an incredibly rapid pace. A majority of these developments are luxurious luxury residences that most people cannot afford. In actuality it was the Spotlight Team at the Boston Globe recently released a set of articles that focused on the development of the new "Seaport" neighborhood. It highlighted the city's lack of affordable housing as well as the inordinate supply of luxury homes that don't meet the needs of the diverse population of the city.

Are these multifamily developments a threat to the multifamily industry? If the market slows down it could be a problem for Class A new construction. However existing Class B & C multifamily communities can stand up to market corrections and imbalances. Let's take a look at the motives for this luxury boom, and what will happen if it comes to an end.

The demand for luxury goods is high.

There are a few important factors that drive the rising demand for luxury apartments. Millennials and empty-nester baby boomers are flocking to city centers such as Boston, Austin & Denver with a discerning taste for high-end finishes and amenity-packed properties. The rise in popularity is due to the fact that empty nesters and double-income millennial households prefer renting rather to purchase. Facilities like top-of-the-line gyms, concierge services and full-service pet spas are becoming standard. It seems like there is an appalling amount of amenities being offered with each new building. These types of modern facilities are being integrated into development projects at a rapid pace and aren't cheap.

Construction costs are high for new construction.

The primary reason for the vast majority of the new housing complexes you see coming on the market are expensive is because of the ever-rising price of construction labor and materials. The demand for construction labor is at an all-time high, and the cost of 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 matter if it's in luxurious buildings or affordable buildings." It costs the same." As a result of high materials and labor costs and the rising value of the raw land developers are being required to construct luxury homes because the numbers simply don't work to build any other type of construction. To ensure affordable housing cities are enforcing rules that require developers to include affordable units within their construction plans. The number of units and the location will determine how much they will charge. However, these regulations alone do not guarantee a significant increase in the amount of affordable housing.

If Affordable Housing Isn't Built, what is the alternative? Homepage.

There have been many boom and bust cycles within the building industry over the years. In many markets around the country, you will see a lot of apartment buildings built in the 1970's and the 1990's. While they may seem outdated compared to current construction however, the "bonesremain in good shape. The buildings built during this time were built using the most modern techniques and materials. They generally only require surface rehabilitation and wear and tear items can be replaced. These communities, as well as the secondary markets they're located in, are positioned well to counterbalance the flood of new luxury apartments and maintain housing that is relatively affordable. The great thing about these Class B homes is that they generally are able to perform well across all economic climates. If the economy is robust, Class C tenants shift to Class B properties. If the economy is struggling, tenants of Class A are forced to move down to more affordable Class B homes. Investors can typically purchase these properties at a fraction of the cost to build and can thus offer a wonderful place to live yet still keep the rents at a level attractive for tenants with different income levels.
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