Does Apartment Size Matter? A Look at the Demand for Micro Units

Despite what many have heard, growth for these much publicized tiny living spaces may not be as wide-spread as many believe. The presence of micro units, loosely defined at 200-600 square feet, in large urban centers may be more of a novelty than a game changer in the apartment industry, some say.

November’s Urban Land Institute report, “The Macro View on Micro Units” suggests that micro units make up a very small piece of the apartment field. Dwellings less than 500 square feet represent only 2.7 percent of the 2012-13 completions studied.

“Micro units are kind of an imaginary trend,” said MPF Research Vice President of Research & Analysis Greg Willett. “There aren’t very many (developers) who have gone into this vertical in a big way.”

Developers resisting temptation to shrink living spaces

After measuring performance of micro units against larger sized floor plans, many developers are shying away from downsizing.

Minimum apartment sizes are already being redefined to appeal to a small segment of the Millennial market that wants more breathing room. Landlords are hedging their bets that young, urban professionals will want to spread out a little bit, to live and entertain inside their apartments.

Dallas-based Trammell Crow Co. has resisted temptations to squeeze its offerings to as low as the 200-300 sq. ft. confines that some say define micro units. Instead, the company is opting for larger apartments in desirable urban areas.

A recent rehab on a former Dallas office building included the addition of a few 560 sq. ft. apartment units that “went like hot cakes” in the last cycle, says Trammell Crow Co. SVP Gary Mann. The company is now upping the square footage in other developments to lure Millennials who are climbing the career ladder.

“In some of our new developments that we’re working on now, we’ve decided to that we’re not going below 600 sq. ft. on the smaller units,” he said recently in Dallas. “The locations of these developments are in great areas and we believe that there will be Millennials living there, so we’re going increase that square footage up a bit.”

Some cities placing restriction on how many smaller units can be built

Smaller units are no stranger to multifamily and have historically catered to single adults who seek life in the urban core, but have a low rent threshold. ULI’s study says that, in general, smaller units have higher overall occupancy rates. They were the top occupancy performers in recently finished developments as of early 2014, with the rate running at 91.3 percent.

Demand, however, may just be keeping up with the times. A recent study by New York University’s Furman Center noted that the number of single households and single adults has grown steadily in the last 70 years, as has the concentration of single individuals in urban areas.

Washington, D.C., Seattle, New York, Austin and Denver have been the primary cradles for the nation’s solo dwellers, who, in many cases, are paying top dollar for spaces a bit bigger than a hotel room. The appeal for smaller units ranges anywhere from residents who just want less space to those who want to live in a trendy location, but are limited financially.

Some cities, however, are facing stiff opposition to small apartments and placing size restrictions on builders. In Seattle, a micro unit hotbed, the city council is considering a proposal to restrict how and where they can be built, to appease angry residents living near matchbox-sized apartments.

That’s changing some thinking for AMLI Residential, which is now looking at upping the square footage on future developments. Steve Hallsey, President & CEO, AMLI Management Co., says the company will remain cognizant of what the future renter will want in two or three years.

“We have always been contrary developers and builders, we believe the micro units have been trendy and cool,” he said. “But you’re beginning to get a ripple effect from some of these areas that are seeing a high number of micro units being developed. I think some municipalities are going to start to push back on the (building) of these smaller units in some of these areas.”

AMLI plans to stay within a 650 sq. ft. floor plan, even though it is dropping the company’s average floor plan size from 880 sq. ft. to 864.  A new downtown Chicago high-rise is attracting significant interest in its 600-plus sq. ft. offerings.

Targeting a demographic that can afford larger spaces may make more sense

Willett says that micro units are just one piece of the urban growth puzzle that developers may want to re-examine as the next development cycle unfolds. Average rents in Intown Dallas for new properties are around $1,739, according to MPF Research, and are typically out of reach for many single Millennials.

“We are limiting who can afford to reside in these brand new projects coming in line in the urban core,” Willett told industry officials recently at the Marcus & Millichap Multifamily Forum. “The people don’t line up with the target market for those units that were built.”

Such an investment may be better suited for 30-something couples with dual incomes that are likely to start a family soon or empty-nesters that no longer want to own. In the end, targeting demographics with a larger purchasing power for urban developments may make more sense than scaling unit size, to attract residents.

Couples who are not far away from bearing children could add an interesting spin on the urban center living landscape, Willett says. While they may seek home ownership the closer they get to having kids, a given is that they’ll need more space.

A quality living experience downtown, however, may be enough to keep the 30-year-olds from fleeing to the suburbs. Downtown Dallas is moving to create downtown neighborhoods that rival the suburban experience, but with the glitz and glamour of the city.

Aside from arts, entertainment, and transportation, the city is embracing the pending arrivals of several new grocery stores in its Downtown District.  John Crawford, President& CEO of Downtown Dallas, Inc., says such developments signal that people are beginning to realize the importance of a vibrant downtown.

Willett ponders whether future urban centers may one day have an even younger appeal.

“We could have a whole bunch of toddlers living downtown,” he said. “Maybe (couples) are going to adapt and raise pre-schoolers in this urban environment.”

When it comes to urban micro units, developers and owners say size still matters to residents, even if it’s cozy.