The idea of living in an apartment not much bigger than a one-car garage may seem a little odd until you consider the tiny house trend and the growing number of digital nomads happily living and working in campers and converted vans. Is a minimalist housing footprint a passing fad or a trend that’s likely to continue?
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What are Microunits?
Microunits, as the name suggests, are tiny apartments, usually in relatively upscale multifamily buildings. “Tiny” is a relative term, and microunits vary in size, but they’re generally twenty to thirty percent smaller than the average studio apartment.
Before the term “microunit” was coined, apartment sizes in the United States were already trending downward even as rents were rising. Between 2008 and 2018, the average newly built apartment shrank in size by 5%, losing 52 square feet, while the average monthly rent increased by 28%. Renters are paying more per square foot than they were a few short years ago, but paying for fewer square feet decreases their monthly payments. That rent differential can make life without roommates possible for many who would otherwise be looking for a co-living arrangement to enable them to live in a highly desirable area.
Who Do Microunits Appeal To?
The largest population segment fueling the demand for microunits is young, single professionals seeking affordable housing in high-rent cities. This cohort, many of them first-time renters who have not yet accumulated a lot of stuff, want the best of what city living has to offer—restaurants, entertainment, shopping, cultural events, employment—all within walking distance. But they also tend to be burdened by student loan payments that limit what they can comfortably pay for housing. Many of them value sustainability and prefer walking, biking, or taking public transportation over the expense and hassle of owning a car in a city neighborhood.
Certain nationwide demographic and economic trends underlie the growing popularity of microunits among Millennials. Many younger adults are postponing household formation, remaining single and childless well into their thirties and forties, giving them a higher degree of mobility than their parents and grandparents enjoyed. The declining rate of household formation means that fewer people are chasing the suburban “white picket fence” lifestyle that was the American dream for the better part of a century. The highest-paying jobs typically are found in cities, not suburbs or exurbs, motivating recent graduates to move to some of the nation’s largest, most expensive cities to launch a career. It can take a few years to command a salary that is high enough to support a one or two-bedroom apartment in an upscale building in a city like New York, San Francisco, Chicago, or Boston.
What Does Microunit Living Look Like?
The idea of living in an apartment that’s not much larger than the average motel room may conjure up images of a rather dark, cramped, utilitarian space lacking both creature comforts and style. And that may not have been far from the truth before microunits became a “thing.” It’s always been common practice, especially in the vicinity of a college or university, for multifamily property owners to carve up one or two-bedroom apartments into smaller spaces, perhaps with shared kitchens and bathrooms, to take advantage of the high demand for inexpensive housing. But that “boarding house” environment is a far cry from properties designed specifically to provide rental microunits.
It’s not uncommon for newer buildings to include both traditional studio apartments and microunits, the latter providing a level of style and comfort comparable to the former but at a price that in the minds of prospective tenants justifies sacrificing some square footage. Microunits often come fully furnished, with multi-functional pieces that make the most of the available space. With a Murphy-style bed that folds up and out of sight and a coffee table that can be pulled up to the height of a dining table, a microunit tenant can entertain guests with comfort and flair.
Microunits usually are a single, rectangular space with no internal walls other than those enclosing the bathroom, or perhaps a half-wall to separate the sleeping area. Well-designed microunits have high ceilings (nine feet or more) , at least one large window, and strategic lighting to create a feeling of spaciousness. They include a kitchen area, even if that’s nothing more than a microwave and/or countertop burner (think “hot plate”) and mini-fridge, but a fully functional, though compact, kitchen is more typical. Some arrangements provide access to a larger communal kitchen for more serious food preparation. Other shared spaces, such as fitness rooms, roof-top terraces, lounges, game rooms, swimming pools, and other amenities, expand tenants’ environment beyond their microunits and foster development of community ties for those who want them. However, many microunit renters, as social as they may be, don’t want or need to socialize with their neighbors in the same building.
What Market Needs Do Microunits Meet?
In 2013, the Urban Land Institute launched a study of the market performance and market acceptance of micro and small units. At that early point in the microunit trend, 97% of renters surveyed cited location as the most important factor in deciding whether to lease a microunit, and it’s still the leading reason. Microunits meet the growing demand for affordable rentals in trendy urban locations in relatively expensive multifamily markets in many Tier I and Tier II cities.
Two market segments in such cities that have proven to be ideal for the introduction of multifamily properties featuring microunits are neighborhoods within walking or biking distance of hospitals and medical centers or colleges and universities. Nurses, interns, residents, graduate students, and junior faculty all spend long hours at work and don’t expect to remain in their current living situation for long. Location is of paramount importance to them, with affordability being a close second. They also appreciate the housekeeping services that are included in the rent in many microunit leases. Turnover among these renters is very predictable, occurring in concert with the academic calendar, which makes it easy for property managers to keep the tenant pipeline full and effect quick turnarounds.
There isn’t much demand for microunits outside of urban and metropolitan markets, though that may change eventually. Attempts to introduce microunit rental properties in established neighborhoods dominated by single-family detached homes have not been universally accepted. When homeowners have opposed the presence of high-density multi-family properties it typically has been for fear of a negative impact on their own property values, or on parking in the area, or on the character of the community. There have been instances in which such public backlash has led to municipalities increasing the minimum allowable apartment size to prevent further attempts to introduce microunits. The lesson learned is that it can be very difficult to create a demand where none exists. It makes much more sense to make substantial inroads in markets where demand is strong and supply is short.
What Does the Microunit Trend Mean for Owners and Investors?
Microunit tenants typically don’t expect to spend years in the same apartment, or even in the same city. In fact, most stay only a year or two before moving up to a larger, more expensive apartment, so turnover can be high. But demand is also high, which means that vacant microunits don’t remain vacant very long, especially in cities that have not been supportive of new multifamily construction and/or maintain minimum apartment size requirements.
Development costs for multifamily properties with microunits are higher than for traditional apartment housing, but the rent per square foot is higher, so it all balances out in the end. Architects and designers are coming up with creative ways to make microunits look and feel bigger than they are. But not all investors and developers are convinced that microunits are here to stay. Some are hedging their bets with a Plan B for converting two adjacent microunits back into a single conventional apartment should the demand for microunits dry up.
What Does the Future Look Like for Microunits?
Increasingly, existing multifamily properties in desirable city neighborhoods are being modified to include at least some microunits in the mix of apartments offered. Former warehouses, schools, malls, and office buildings can be repurposed as residential rental properties offering only microunits or a combination of microunits, conventional studios, and one or two-bedroom apartments.
There is, however, an unfortunate perception that high-density housing is substandard housing, which is reflected in zoning regulations since the days of overcrowded urban tenements. New construction of any kind is uncommon in high-density areas where undeveloped land is a rarity, and when it does occur, the creation of microunits often is limited by minimum square footage requirements for rental housing. Some cities including New York, San Diego, and San Francisco have eased regulations that previously blocked the development of microunits and other forms of affordable housing.
There is little doubt that microunits are meeting a current need in certain housing markets—a need that is likelier to grow than to dry up, though the pace and extent of its growth is difficult to predict. Continued growth of the supply of microunit housing is going to depend in large part on the willingness of city officials to reform minimum square footage requirements to permit the creation of new microunits. And that may require some lobbying by developers and investors.
Kent Ritter is an experienced multifamily investor and entrepreneur empowering you to build real wealth through real estate syndication. Learn More.