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 an author of the study. Read the full report here.
This is the second in a series of blog posts summarizing the group’s findings and conclusions, in which we take a closer look at the target market, and explore the challenges and opportunities involved in developing and managing a micro-unit community.
The study revealed that the majority of residents that choose micro units are young professional singles. They are typically first-time renters who have not accumulated much “stuff” yet and are, therefore, much more comfortable with limited space. Many consider these units “launch pads” for new careers and lives in a new city or place. Micro-unit occupants are self-described as social animals, but ones who do not want or need to socialize in their private units. Micro-unit renters don’t tend to remain long in their unit: they stay only one or two years and then graduate to a larger unit.
Perhaps not coincidentally, the rise in micro units has corresponded with an increase in millennials, also known as Generation Y, entering the workforce.. Micro units, in its design, location, and economics, appeal to Gen-Y’s lifestyle. First of all, they are highly mobile and tend to move frequently to follow opportunities and jobs. Many millennials choose where they want to live first and then look for a job. This generation has demonstrated a renewed interest in urban and urbanizing “authentic” locations—transit-rich locations are a plus, but walkability is a must. The Great Recession has had a disproportionately large impact on millennials, with unemployment among the cohort nearly double that of older members of the labor force. As a result, outside of the tech sector, millennials in general have significantly lower incomes and much higher student loan debt loads, and therefore less disposable income to spend on things like expensive apartments. All of this has contributed to delayed household formation and delayed marriage among members of the millennial generation. Many of these same factors are what make micro units so attractive.
Patrick Kennedy of Panoramic, who has conducted research on micro units, including constructing a life-size mock up of a micro unit, has built one small micro unit apartment building and currently has a 160-unit all micro-unit community under construction in San Francisco. He describes four key trends that are increasing the appeal of micro units:
- Delayed household formation and/or post-collegiate odyssey;
- An increase in single-person households;
- A decrease in car ownership, particularly among millennials;
- Younger households with less accumulated stuff and a growing “sharing economy.”
Three closely interconnected “purchase motivations” have become apparent as driving the interest in micro units. The most important factor seems to be the desire to live in walkable, trendy locations, primarily in the urban core of relatively expensive apartment markets. Next is economics, and the willingness of renters to trade off square footage for less absolute rent in these highly desirable urban locations. Finally, the desire to live alone is one of the primary motivators that draws residents to the micro-unit concept. In expensive urban markets, the ultimate renter is often a parent who is subsidizing rent for “delayed-adult-onset-syndrome” children who seek to extend college lifestyle.
As we mentioned in our first blog post on micro units,, the “sweet spot” where potential residents seem to choose micro units over conventional studio and one-bedroom apartments is when micro units are priced at approximately 25 percent to 30 percent below rents of conventional units, controlling for other factors (e.g., location, age, unit features), and are in line with or below the cost to share a larger apartment with one or more roommates. This seems to be the point at which a segment of the market is willing to trade off considerably less space for lower rent in a well-located, highly amenitized community. Apartment residents don’t think in terms of cost per square foot per month, but rather think about their monthly rent cost relative to their overall monthly budget.