Micro Units: Challenges & Opportunities

THE MACRO VIEW ON MICRO UNITS

In Fall 2014, The Urban Land Institute Multifamily Councils published a report that examined, from multiple perspectives, the market performance and and market acceptance of small or “micro” residential units. Teresa Ruiz, SB Architects’ expert on multi-family residential design, and a prominent member of the Urban Land Institute’s Multi-family Council, was a member of the 4-person Committee that orchestrated the study. Read the full report here.

This is the third in a series of blog posts summarizing the group’s findings and conclusions, in which we explore  the challenges and opportunities involved in developing and managing a micro-unit community.

Challenges and Opportunities

In our first blog post on micro units we established that, while much depends upon the market, a good general definition of a micro unit is a purpose-built, typically urban, small studio or one-bedroom using efficient design to appear larger than it is and ranging in size from as little as 280 square feet up to as much as 450 square feet (20 to 30 percent smaller than conventional studios in a given market).To give a sense of perspective, a 300-square-foot micro-unit studio apartment is slightly larger than a one-car garage but considerably smaller than a two-car garage.

Not surprisingly, micro units are found almost exclusively in expensive urban core locations, almost exclusively, in mid-rise and high-rise buildings to offset land and construction costs, rather than in low-density communities. As a general rule, developing and operating a rental apartment community with micro units is more expensive. However, early data indicate the premium rent per square foot achieved more than makes up for the added cost. Among properties that offer very small units, those specific units tend to be the top-performing floor plans in the individual communities.  However, the jury is still out on the long term operational cost comparison with conventional units.

Likely due to market demographics, demand, as well as relaxed regulations the Northeast has long had a rent premium on smaller-sized units, including the newer built units.  However, data from the South and West really tell the trend. In the South, units less than 600 square feet achieve price premiums of 40 percent over mid-sized units and 56 percent over large units. In the West, price premiums for small units reach 43 percent over their mid-sized counterparts and a whopping 80 percent over the large units.

A noticeable shift has taken place over the past decade toward a greater mix of smaller studio and one-bedroom apartments, with micro units as part of  a growing trend across the country, the number of communities under construction and in the planning stages continues to increase. However, to hedge their bets, some savvy developers are building in the flexibility to convert side-by-side micro units back into conventional one- and two-bedroom units, just in case the concept proves to be short-lived.

During the period of the study, there were relatively few rental apartments are purpose built entirely with very small units. However by the time of publication, many of the communities currently under construction or proposed are mostly if not entirely micro units, confirming that this is a growing national trend.

The increased popularity of micro-unit communities  has generated considerable controversy in some markets. Detractors complain about the strain these communities put on parking in the neighborhood and the density of these types of communities that are, while permissible, often out of character with the existing housing stock. Moreover, they contend that micro-unit communities, particularly those structured with short-term leases, attract a less stable population.

The selling proposition to developers, owners, and operators is all about the economics. Achieving higher density often translates into higher yields. From a construction standpoint, at the time of the study, building a micro-unit community costs approximately 5 percent to 10 percent more per square foot because of the relatively fixed cost associated with building a kitchen and a bathroom, which is generally the same for a micro unit as for a conventional unit. However, the typically 25 percent higher value ratio that can be achieved for these units, which offsets the higher construction and short term maintenance costs.

Managers of communities with micro units report slightly higher operating expense per square foot, perhaps an additional $5 per square foot higher annually, because a building with a high percentage of very small units tends to generate more trash per square foot than a similar-sized conventional project. Yet again, these same operators report that the higher value ratios can more than compensate for the increased operating cost per square foot.