CNBC released a report last week stating that the multifamily realty sector is experiencing an "acute crisis". The article suggests that the upper end of the market for luxury is overbuilt and susceptible to a flattening or 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 the previous year. In these new housing units, nearly 75-80% are considered luxury communities. ,Click here.

When I lived in Boston over the past few years, I've witnessed many major developments being built in a rapid manner. The majority of these properties are luxurious luxury residences which the majority of people can't afford. The Boston Globe's Spotlight Team recently published a series articles about the development of the "Seaport" neighborhood. The article highlighted its lack of affordable housing, as well as an abundance of luxury houses which does not serve the diverse population in the city.

Are these multifamily developments danger to the multifamily industry? The threat to Class A new construction is evident if the market is flat, however; the existing Class B & C multifamily communities are uniquely positioned to stand up to market imbalances and corrections. Let's take a look at the motives of this luxury boom and what happens if the boom ends.

Luxury demand is strong

There are two major reasons to the increasing demand for luxury homes. Baby boomers are moving to cities such as Boston Austin, Boston, and Denver, with a taste for luxury finishes and amenities-packed structures. This boom can be attributed to the reality that empty-nesters and double-income millennial households prefer renting rather than purchase. The latest gyms, concierge services and spas with full-services for pets are all becoming commonplace. With every new development, it seems as though there is an amenities arms race. Developers are rushing to incorporate modern amenities in their developments, however, it doesn't come inexpensively.

New Construction is costly.

The main reason for the fact that most new developments you see in the marketplace are of high-end quality. This is due to the growing costs of construction labor. The demand for construction work is at an all-time high, as is the cost of materials is at their highest 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 structures or in affordable ones." It's the same price." As a result of high materials and labor costs and the appreciation of the raw land developers are being obliged to build luxurious products because the numbers simply don't allow for building anything else. Cities are being forced to adopt laws that force developers to construct an amount of affordable units in their new construction projects. The number of units and the location determines how the developers will be able to charge. These regulations will not lead to an increase in housing for the poor.

What alternatives are there to affordable housing? Visit here.

There have been many boom and bust cycles within the building industry over the years. In many markets around the country, you'll notice large numbers of homes built between the 1970's and the 1990's. While they may seem out-of-date compared to the current construction however, the "bonesare still in good condition. 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 repaired. These communities, as well as their secondary markets are well placed to counteract the overflow of luxurious apartments. They also offer affordable housing. These Class B properties are able to perform in any economic climate. When the economy is strong, Class C tenants move into Class B properties. If the economy is weak, Class A tenants have to shift to more affordable Class B homes. These homes are usually accessible for less than price of construction. This allows investors to offer a great location to live in and still maintain attractive rents that tenants of different income levels are able to afford.
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