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Why Property Owners Should Consider Micro-Apartments

 

Some U.S. cities are maxing out their population capacity with little room to grow. In response, they have two options: develop higher or now, in the case of the latest trend, smaller. Introducing micro-apartments, a new housing option that’s popping up in population-dense cities like Vancouver, Chicago, San Francisco, New York City and Boston.

Designed to meet the growing demand for one- and two-person households in urban centers, micro-apartments target middle-class, single, and Generation Y residents, who may otherwise be unable to afford housing in these prime neighborhoods. Often smaller than existing city codes allow, the rise of micro-apartments has driven some mayors, like Mayor Bloomberg, to modify minimum living space ordinances.

Investors see micro-apartments as profit opportunities, while property developers are creating entire micro-apartment developments. Property managers in densely-populated cities have the opportunity to capitalize on this trend. Managers should take the time to understand this new market opportunity and work alongside property owners and developers to execute a plan with long-term profit potential.

The Case For Micro-Apartments

If you own properties in population-dense cities, this could be an opportunity to convert existing units into micro-units. This gives you more rentals within your portfolio.

For example, New York City sets its minimum square footage to 250, and the average square footage of a one-bedroom apartment there is 750. This means you could create three micro-apartments out of one average-sized apartment.

These units will command lower than average rent, but of course you now have more units. For example, 300-square-foot units offered by Smartspace in San Francisco are going for $1,600 a month. While still pricey, this is considered a bargain in the city, where the average rent was $2,741 in Q4 2012.

If one traditional unit equals three micro-units, this scenario would yield $4,800 in a month’s rent–two thousand dollars more than the income from an average rental.

Micro-apartments are competitively priced and access an underserved tier of the rental market that really wants to live in these neighborhoods. The target demographic for micro-apartments wants to live in urban centers but struggle with the high rent common in urban neighborhoods. The lower rents of micro-apartments give renters a way to live centrally as long as they are willing to sacrifice square footage.

Furthermore, existing apartments aren’t the only kind of building that can be converted into micro-apartments. Developers in Chicago have been flipping foreclosed flophouses into micro-apartment development projects since last year.

And just this month, architects in Providence, Rhode Island, converted a historic mall that was on the Providence Preservation Society’s “10 Most Endangered Buildings” list into a micro-apartment complex with 48 apartments. Opportunities for conversions of structures like these are plentiful.

Considerations for Property Owners on the Fence

There are, of course, many things to keep in mind before determining whether this is an optimal decision for your portfolio. For example, more units will require more maintenance, and having more tenants can lead to more administrative duties. Determining your bandwidth to manage more properties is essential in the planning phase.

The cost of either converting or developing a micro-unit community is also something to consider. Smart design is necessary to ensure all a resident’s needs are encompassed in a mere 250 square foot space (or less–in San Francisco, the minimum square footage is 220 square feet).

It’s a bigger task than simply chopping an average rental into two or three units. And in addition to design fees, there will of course be sizable construction costs and lost rental income while units are being converted.

It’s also vital to assess your market opportunity. Are your properties in a prime or up-and-coming neighborhood? Does the right demographic–single and two-person households seeking an affordable, urban lifestyle–live there now, or aspire to live there? And will this neighborhood and demographic profile remain in place for several years?

As a property manager, how do you feel about this trend? Is it one your management company has considered becoming a part of? Or, if you have experience managing such properties, what advice would you give other managers considering this? Feel free to share your thoughts below, or email me: ashley@softwareadvice.com.

8179882947” created by Elliott Brown used under CC BY / Resized.

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Ashley Halligan

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Ashley Halligan is a contributor to Software Advice.

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