Micro Units: What Are They?

In Fall 2013, The Urban Land Institute Multifamily Councils were awarded a ULI Foundation Grant to study, from multiple perspectives, the market performance and and market acceptance of small or “micro” residential units. At the end of 2014, the group published its findings. Read the full report here.

Teresa Ruiz, SB Architects’ expert on multifamily residential design, and a prominent member of the Urban Land Institute’s Multifamily Council, was a member of the 4-person Grant Committee and orchestrated the study. In a series of blog posts, we will share excerpts of the council’s  findings, that examined the market s for micro units, market preferences, challenges and opportunities, and best practices.

What exactly is a micro unit?

Living “alone” is becoming a luxury lifestyle in many expensive cities.  With the rising land and construction cost, developers are seeking ways to offset the cost while maintaining a relatively affordable rent.  The ultimate incarnation of this trend has been the introduction—or the reintroduction—of very small units, often referred to as “micro units.” These very small apartments lease at approximately 20 percent to 30 percent lower monthly rent than conventional units, yet at a higher rent per square foot. They have been offered or are being considered in urban and urbanizing locales, particularly high-density, expensive metropolitan markets such as Boston, New York, San Francisco, Seattle, and Washington, D.C.

What exactly qualifies as a micro unit? It might be 300 square feet in New York City or 500 square feet in Dallas. Although “micro unit” has no standard definition, a good working definition is a small studio apartment, typically 20 percent to 30 percent less in square footage than conventional studio, corresponding to the expected lower monthly rent.

The concept of micro units is, to a degree, relative to the market in which they exist. In New York City, a 400-square-foot minimum was waived to accommodate studio micro-units of 275 to 300 square feet. In San Francisco, new legislation allows units as small as 220 square feet, but has since added a cap to the amount of micro units the City can approve. In some Midwestern and Texas markets, units ranging between 400 and 500 square feet are described as micro units, while Seattle and Portland have no minimum size requirements,  – which explains why these two markets have a tremendous amount of experimentation with very small units.

Is there a market for micro units?

The initial study shows that smaller and micro units outperform conventional units in the marketplace as they achieve higher occupancy rates and garner significant rental-rate premiums (rent per square foot) compared with conventional units. However, the stock of very small units is still limited, so it is difficult to discern whether the performance of these smaller units is driven by their relative scarcity or whether significant pent-up demand for micro units actually exists. In addition, their long term operational, maintenance and turn costs remains unknown.  Nonetheless, both consumer research and case studies indicate that a segment of renters is indeed interested in the micro-unit concept. However, the amount of existing inventory is small, so it has yet to be proven whether this is a potentially large market or a niche.

As one might expect, the target market profile for micro units is predominantly young professional singles, typically under 30 years of age, (with most under 27 years of age), trending slightly more male than female. Secondary segments include some couples and roommates, some older move-down singles, and pied-à-terre users. The appeal of micro units is largely about economics, but place and privacy are all part of the equation. Most respondents interested in micro units are willing to consider them in exchange for a lower monthly rent, a highly desirable location, and the ability to live alone.

With the common perception that unit sizes in new apartments have been shrinking, the study looks at metros in the South and West regions of the United States have the most supply and most clearly illustrate the general trend toward smaller average unit size. The dominant influence behind the general trend toward smaller average unit size is not a decrease in size across unit types. Rather it is caused by a shift in the mix of unit types where we see a move toward more studio and one-bedroom units..

In general, smaller conventional units enjoyed higher occupancy rates and higher rental rates than larger units. While these unit types typically cost more to maintain, (we’ll explore this further in our next blog post), the premium still holds true.Small units thus appear underrepresented in the inventory relative to demand potential. However, the total stock of conventional units under 600 square feet that has been introduced is very limited, so it is still difficult to know for certain if the demand is due to constricted supply or represents true unmet demand.

Conclusions

Confirming the general perception that exists in the industry, average unit size has been shrinking. This shift is not as pronounced as some might think and the key driver behind shrinking average unit size does not necessarily align with conventional wisdom. However, the shift in unit mix corresponds to a greater share of development occurring in core urban settings, where household size is smaller.

It is tempting to call smaller, “micro” units, rock stars, based upon current higher occupancies and rental premiums. In fact, however, the strongest relationship tends to be between occupancy performance and the absolute number of units in that unit-size segment – the fewer the number of units built in any category, the higher the occupancy rate in that niche. Right now, the smallest absolute number designation belongs to the “micro unit” – thus the rock star status. Only time – and larger inventory – will confirm if this indicates the long-term market potential offered by a large amount of unmet demand. However, given current demographic trends in the United States, this may very well prove to be true.