Micro Units – The Economics Behind a Smaller Footprint

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If you are living in any major metropolis, you have likely seen the increasing trend of micro units being built in your city. Although there is no standard definition, micro units are small studio apartments generally ranging from 200 to 400 square feet. Micro units are generally equipped with a fully functioning and ADA compliant kitchen and bathroom. While these creative and well-designed floor plans attract consumers for a multitude of reasons, there is one major factor driving demand- rental costs.

Zumper, a leading apartment listing service, recently posted their National Rent Report for September 2020. With one-bedroom median rent prices topping out at $3,040 in San Francisco, CA, it should come as no surprise that people are seeking more affordable options for their housing.  The ten most expensive cities averaged rents of $2,185 for a one-bedroom unit, a shocking figure if you are a resident of Akron, OH paying $580 for a comparable unit. If you are looking for affordability in any of the major cities in the United States, micro units may be your only option. According to a report by the Urban Land Institute, micro units are generally twenty-five percent less expensive then their conventional studio counterparts. As an example, if a conventional 500 square foot studio is asking for $1600 a month in rent, the 300 square foot micro unit would have asking rents set at $1200. For those of you that did the quick math while reading this, you are probably jumping out of your chairs screaming “The micro unit costs eighty cents more per square foot!” While that may be true, renters do not think in terms of the value ratio, their primary concern is monthly rent cost.

The pricing disparity in rent per square foot for micro units is even wider in major cities like New York, Boston, and Los Angeles. Rent for one of the new micro units at Ollie at Carmel Place  , in New York, will set residents back $2995 for a 360 square foot unit. If you do some back of the napkin math, it comes out to $8.32 per square foot. While that may seem absurd to some, the price point allows access to a neighborhood that could otherwise be unaffordable to residents. While neighboring apartment complex Kipsbay Court offers units at a cost between $5.45 to $7.17 per square foot, a one-bedroom unit will cost residents between $3,770 to $4,965 per month.

While the cost of micro units in cities like New York seem inflated to most, could these apartments provide more affordable housing options in smaller markets like Tampa, FL? As shown in the National Rent Report by Zumper, the median one-bedroom price for a unit in Tampa is $1,180. If you are looking to live anywhere near downtown, you can plan on paying north of $1,500 for your one-bedroom apartment. The newly built Havana Square in Tampa’s Hyde Park can set residents back as much as $1,710 for a one-bedroom, 784 square foot unit, or $2.18 per square foot. Imagine a micro unit complex in the same vicinity or equal distance to the downtown area that provided 330 square foot units at $1,100 a month. Although the price per square foot of $3.30 is much higher than that of its would be neighbor, the price point is far more accessible to a much larger demographic. Another factor to consider if you are analyzing the properties at a rent per square foot basis is that most of the micro unit communities come fully furnished with multifunctional furniture, have free wi-fi for their residents, and include water, electric, and trash in the monthly rent. With those factors accounted for, are residents truly paying that much more per square foot? Let us assume that the average monthly cost for the bundled included amenities is $358. That would bring our price per square foot down $2.24 for the micro unit. While micro units may not be the only solution for more affordable housing in cities, it would seem that in the right market it could provide access to a larger group of renters looking to live closer to work or the amenities that they desire.

Some may argue that the cost of construction for building micro units may not be feasible due to the fixed cost associated with having a kitchen and bathroom inside each of the smaller units. On average, it cost between 5 and 10 percent more per square foot to build a micro unit community. Property managers of some of these communities also report an additional $5 per square in maintenance cost. The construction and maintenance cost are more than offset by the higher value ratio that can be achieved. Patrick Kennedy, owner, and president of Panoramic Interests takes the opposite stance and believes micro units are a more cost-effective way to develop properties. Kennedy states that the savings come from three different factors; they tend to be car-free developments, promote economized living spaces, and have standardized designs. From an investor’s or developer’s perspective, it seems that the unit economics make sense in the right market.