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March 14, 2021

While COVID-19 caused many renters – particularly households with children – to migrate from densely populated cities to more spread out, suburban neighborhoods, younger renters have continued to seek out urban apartments at a healthy clip. According to Zillow, many of these young adults moved back in with family at the start of the pandemic, but have largely begun seeking out fresh apartment deals in urban markets despite the growing ubiquity of remote work (1).

And while the concessions and rent discounts most urban apartments are currently offering may dry up as COVID-19 recedes, there is one emerging property class that may be well positioned to cater to these enterprising, city-bound renters – micro-unit apartments. While micro-units are relatively new within the U.S. market, these resource-efficient, fully furnished apartments provide a wide array of important benefits that extend beyond what most traditional studios offer – at a price point tailored to budget-conscious renters.

But before we explore the potential benefits of this exciting property class, let’s take a closer look at what these micro-unit apartments are.

 

What are Micro-Unit Apartments?

The term ‘micro-unit apartment’ typically refers to an apartment with units that range between 250-400 sq. ft. and cater to price-sensitive tenants who prioritize location and affordability over spaciousness. As a result, the majority of micro-unit apartment tenants in the U.S. consist of young professionals in bustling urban centers where traditional single-bedroom apartment rentals can be cost-prohibitive.

While micro-units are often compared to conventional studio apartments, micro apartments are more design-forward and tenant-friendly in the sense that their units commonly feature convertible furniture systems, high ceilings and oversized windows to provide a more spacious feel, and well-furnished community spaces. While micro-units have long been a common fixture in major international cities such as London, Berlin and Tokyo, this property class only began taking root in the U.S. after the 2008 Recession – starting off in New York and Seattle before expanding to other markets including Los Angeles, Portland and Miami.

That being said, why is now a good time to consider investing in micro-unit apartments?

 

When it Comes to Micro-Units, Location is Everything

Micro-unit apartment operators can typically set favorable rent prices primarily based on their property’s premier location, rather than unit size. This is because micro-unit apartments are typically located in walkable, well-developed neighborhoods that offer a rich array of convenient entertainment and employment options. In fact, an Urban Land Institute study found that 97% of micro-unit renters named their property’s location as the primary deciding factor when signing the lease. In other words, while micro-units generally feature polished furnishings and high-quality amenities, demand is mainly driven by environmental perks that extend beyond the units themselves.

The fact that location is such an important factor suggests that many tenants intend to spend a significant amount of time near their home, which stimulates local businesses and community development. And while there were concerns that COVID-19’s impact on these urban hubs would dampen enthusiasm for micro-units, property managers and tenants from Seattle (3) to the Twin Cities (4) have not reported any significant upticks in vacancy rates through 2020. With the nation’s COVID-19 vaccine distribution efforts months ahead of schedule, we believe that most remaining safety concerns centered on population density will subside.

 

Micro-Units Offer Value for Money

While micro-unit rentals cater to a broad range of tenants, most of these properties aim to attract new graduates and young professionals that are under 30 years of age — a demographic that represents roughly 49% of the U.S. renter population (5). The fact that micro-units generally lease at a 20-30% lower monthly rent compared to conventional apartment units makes these assets a cost-accessible housing option for renters who value both location and affordability — an oftentimes elusive combination for city renters (6).

Even before the pandemic upended countless livelihoods, U.S. wage growth had remained stagnant across most income brackets over the past several decades. As a result, past studies have shown that millennials have the highest debt levels relative to other generations and are generally more budget-conscious and risk-averse than other age groups when it comes to personal finances (7). As a result, micro-units are an increasingly popular choice for these renters, and the growing number of millennials entering the workforce and rental market has corresponded with a rise in U.S. micro units (8).

In addition to helping tenants save on rental costs, micro-unit apartments provide investors with a number of potential financial benefits. Operators are typically able to generate more rent revenue by fitting more rentable units into a single complex, relative to their conventional counterparts. And since micro-unit tenants prioritize location above all other factors, these units can be rented out at costs that are relatively higher per square foot compared to most standard apartments – thereby upending the long-held real estate mantra that apartment rent prices are primarily determined by square footage. Additionally, micro-units are oftentimes more energy and resource-efficient from an operational standpoint, which results in lower construction material costs and utility bills (4).

 

Micro-Units Enable a Flexible, Unencumbered Lifestyle

Micro-units cater to tenants who are willing to compromise on living space in exchange for immersive yet affordable city living. Many of these traditionally younger tenants work long hours or have a busy social schedule, and therefore see their residence as a place to rest and store their possessions (9). With more young professionals traveling for work or embracing the ‘digital nomad’ life, micro-units present an enticing option, in that these units help keep costs at a minimum while allowing tenants to travel for work or go on vacation free of financial guilt. And many micro-unit apartments offer short-term leases, which gives tenants more flexibility when they need it. Although this means that micro-unit apartments generally have higher turnover rates than conventional apartments, as a whole they also have higher occupancy rates and lease faster than their counterparts (2).

The fact that many micro-units provide common household accessories and come fully furnished with adjustable furniture such as murphy beds, convertible seating, and extendable tables also helps tenants save on moving and living costs. The argument that millennials generally spurn worldly possessions in favor of experiences may be a bit overblown. However, with society edging towards eco-consciousness over rampant consumerism, many people – particularly geographically mobile renters – are trying harder to avoid unnecessary purchases when possible. Micro-units make this much easier to accomplish, and these property’s focus on providing multiple well-furnished social spaces ranging from rooftop decks to ground-floor restaurants and cafes helps provide a genuine sense of community.

 

With Micro-Unit Apartments, Less is More

With affordable housing supply remaining low and half of all Americans living within a central city (10), many housing experts and city officials see the development of micro-housing as a way to bring in more apartment units at a lower-end price point and mitigate the nation’s severe housing shortage (3). According to the Urban Land Institute, 82% of micro-unit renters did not intentionally set out in search of this unit type when looking for their next apartment, but were nonetheless drawn in by the numerous benefits micro-apartments provide.

In other words, micro-units address a significant and growing housing need within the U.S., and tenants and investors alike are only recently growing aware of the unique value proposition this exciting property class provides. For many tenants, community and affordability will never go out of style, and as efficient usage of limited urban spaces becomes an increasing priority we expect more micro-units to pop up in America’s most high-demand cities.

 

If you want to learn more about this relatively new property class, we encourage you to take a look at our recent micro-unit development deal in Portland, OR. The Sponsor on this deal has completed 12 micro-unit projects across the northwestern U.S., including six in Portland, and to date the Sponsor is responsible for roughly two thirds of all the micro-units currently in Portland’s development pipeline. This deal closes soon so if you’re interested reach out to your Licensed Investment Specialist today!

 

 

(1) Source: Zillow
(2) Source: Urban Land Institute
(3) Source: Spectrum News
(4) Source: Star Tribune
(5) Source: iProperty Management
(6) Source: Financial Samurai
(7) Source: The Conversation
(8) Source: Mashvisor
(9) Source: Engel & Völkers
(10) Source: U.S. Department of Housing and Urban Development