CNBC released a report last week stating that the multifamily realty market is facing an "acute crisis". The article concludes that the upper end of the market for luxury is overbuilt and susceptible to flattening or a market correction. Developers of apartments in the top 150 US towns constructed 395 775 housing units during the financial year. This represents an increase of 46% compared to previous years. In these new units of housing, about 75-80% of them are considered luxury communities. ,Visit this link.

While living in Boston over the past few years, I've seen several major developments being constructed in a rapid manner. Most of these homes are luxury homes that the majority of people are unable to afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. It highlighted the city's shortage of affordable housing and the excess of luxury housing which doesn't accommodate its diverse population.

Do these multifamily developments pose a threat to the multifamily market? If the market is flat and the risk of collapse increases, it is of a collapse for Class A new construction. However existing Class B & C multifamily communities are able to withstand market fluctuations and imbalances. Let's look at the reasons the reasons for such an increase in luxury and what could happen if demand subsides.

Luxury Demand is Strong

There are two important factors that drive the increasing demand for luxury homes. Millennials and empty-nester baby boomers are moving into cities like Boston, Austin & Denver with a discerning taste for luxury finishes and luxurious buildings. This boom can be attributed to the fact that empty nesters and double-income millennial households are opting to rent instead to purchase. High-end gyms, concierge services and full-service spas for pets are all becoming the norm. There is an inordinate number of amenities offered with each new building. Developers are aggressively incorporating these types of modern perks in their developments, however it's not cheap.

The cost of construction can be expensive.

High-end housing is the primary reason for the fact that most new developments you see on the market are expensive. This is because of the growing costs of construction labor. The demand for construction labor is at an all-time high, as is the price of building materials is at the highest they've ever been. According to Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-4 doesn't matter if it's in a luxury structure or in a low-cost building. It's the same price." It's the identical." Cities are forced to pass regulations to force developers to create a certain number of affordable homes within their new construction projects. Typically between 10%-20% depending on the number of units and location. But these rules alone won't result in a significant growth in affordable housing.

If Affordable Housing Can't Be Constructed, What's the Alternative? Read 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 see a lot of homes built between the 1970's and 1990's. Although these properties might seem out-of-date compared to the current construction, the "bonesare still in good condition. These buildings were constructed with modern materials and techniques. They usually need only surface repairs and wear-related items are able to be repaired. These communities, as well as the secondary markets they're in are well-positioned to counterbalance the flood of luxury new homes and to maintain housing that's fairly affordable. These Class B properties are able to thrive in any economic environment. When the economy is strong, Class C tenants are able to move into Class B properties When the economy is struggling, Class A tenants can no longer justify the luxury rents, and they typically shift to more affordable Class B properties. These homes are usually accessible for less than cost of building. This permits investors to provide the perfect property to live in while still offering appealing rents that tenants of different incomes are able to afford.
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