This past week, CNBC published an article in which they claimed that "There is a crisis of extreme proportions that is coming our way" within the multifamily real estate market. According to the article the upper-end of the luxury market is overcrowded and susceptible to market fluctuations or flattening. In reality, apartment builders in the top 150 US cities constructed 395,775 brand new housing units in the last year, which is a 46% increase Y-o-Y. Of these new units of housing, about 75-80% of them are considered to be luxury communities. ,Visit this link.

While living in Boston over the past few years, I've witnessed many major developments being built at a breakneck speed. As a result, the overwhelming majority of these are luxurious luxury residences that the average person can't afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "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 its diverse population.

Are these multifamily developments danger to the multifamily industry? If the market flattens, there is a risk of a collapse for Class A new construction. However the existing Class B & C multifamily communities are able to withstand market fluctuations and imbalances. Let's look at the reasons for this luxury boom, and what happens if the boom ends.

Luxury Demand is Strong

There are two major reasons to the increasing demand for luxurious apartment. Generation Y and empty nester baby boomers are moving to cities like Boston, Austin, and Denver with a discerning palate for luxurious finishes and amenities-packed structures. This growth can be attributed to the fact that empty nesters and families with double incomes in the millennial generation prefer renting rather than purchase. Benefits like high-end gyms, concierge services, and full-service pet spas are becoming standard. Every time a new construction is completed it appears that there's an arms race. Developers are rushing to incorporate these modern perks into their plans, but they're not cheap.

New Construction is costly.

Luxury housing is the main reason that the majority of developments on the market are expensive. This is because of the growing cost of construction work. The demand for construction work is at an all-time high and the cost of building materials is the most they have 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 exactly the same price. It's the same." To provide affordable housing, cities are enforcing regulations that require developers to incorporate affordable units within their new construction projects. The typical range is between 10 and 20%, based on unit count and location. The regulations won't lead to an increase in affordable housing.

If Affordable Housing Isn't Built, what is the Alternative? Read this.

There have been numerous cycles of boom and bust in the building industry over the years. In numerous markets across the country, you'll see a lot of apartment buildings built in the 1970's and the 1990's. While these homes may appear out-of-date compared to the current construction however, the "bonesare still in good condition. The buildings built during this time were constructed with advanced materials and techniques. They typically need only surface repairs and wear and tear items can be repaired. These communities and their secondary markets are well placed to offset the flood of luxury apartments. They also offer affordable housing. The great thing about these Class B homes is that they typically perform well across all economic climates. If the economy is flourishing Class C tenants can shift to Class B properties . When the economy is in decline, Class A tenants can find it difficult to justify the extravagant rents, and they typically shift to class B properties. Investors are able to purchase these properties for less than the price of construction, which allows them to provide a comfortable living space, yet ensure that rents remain affordable to tenants with varying income ranges.
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