CNBC issued a report this week that stated that the multifamily realty market is experiencing an "acute crisis". According to the article the luxury market's upper end is overcrowded and susceptible to market declines or flattening. Apartment developers in the largest 150 US towns delivered 395 775 new housing units last financial year. This is a 46% increase over previous years. About 75-80% of these new housing units are luxury communities. ,Read this.

When I lived in Boston in the last few years, I've seen numerous major developments being constructed at a breakneck speed. Most of these homes are expensive luxury apartments that the majority of people are unable to afford. In actuality, the Spotlight Team at the Boston Globe recently published a series of articles that focused on the creation of the "Seaport" neighborhood. It highlighted the city's lack of affordable housing, as well as the overabundance luxury housing which doesn't accommodate its diverse population.

With the arrival of all of these new multi-family luxury properties is this putting the entire multifamily sector at risk of flattening or even a collapse? The risk to Class A new construction is apparent 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 reasons for such an unprecedented growth in the luxury market and what will happen when demand slows.

The demand for luxury goods is high.

There are a couple of major factors driving the increasing demand for luxury homes. Generation Y and empty nester baby boomers are making their way to cities like Boston and Austin as well as Denver, with a taste for luxurious finishes and amenities-packed structures. One reason for this boom is that lots of double-income households of millennials and empty nesters with the money to purchase are choosing to rent. The latest gyms, concierge services and full-service spas for pet owners are all becoming regular. Every time a new construction is completed, 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.

New Construction is Cost Prohibitive

The reason the overwhelming majority of new residential developments being put up for sale is luxury is due to the ever-rising cost of construction labor and building materials. Construction is a high-demand industry and materials are at their most expensive ever. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury building or in a budget-friendly construction. It's the same price." It costs the same." Cities are forced to pass laws that force developers to construct an amount of affordable units within their construction projects. Most often, between 10% and 20% based on the unit count and location. These regulations will not cause an increase in the number of affordable homes.

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

Over the past few decades, there has been building booms and busts. In many markets around the country, you'll find a large number of homes built between the 1970's and 1990's. Although they may seem old-fashioned in comparison to the modern buildings being constructed in the present, the "bones" are in good shape. The buildings built during this time were built using the most modern materials and techniques. They typically need only surface repairs 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 influx of new luxury apartments and provide housing that's fairly affordable. The great thing about these Class B properties is that they typically excel regardless of the economic conditions. When the economy is strong Class C tenants can are able to move into Class B homes. If the economy is weak tenants of Class A have to shift to Class B properties. These homes are usually available for less than the cost of building. This allows investors to offer an ideal place to call home while still offering attractive rents that tenants with different income levels are able to afford.
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