Competition in the multifamily market is stiff, as investors and developers alike flock to the popular commercial property asset.
In a move to minimize competition and increase profits, some investors are targeting two populations set to explode in size over the next several years: Baby Boomers and Millennials.
At the moment there are 76.4 million Baby Boomers in the U.S., and this number is expected to reach 61.3 million by 2029. As their children age and move out, more and more Baby Boomers are leaving the suburbs and returning to the city. With retirement on the horizon, many are attracted to the city with its rich culture and easy access to transportation and health care.
At the same time, aging Baby Boomers are trading in their sprawling suburban properties for upscale urban living, happily paying premium prices for high-end apartments with sophisticated amenities like concierge services, chauffeured car service, and even on-site movie theaters and restaurants.
The second group, Millennials, are presently the largest demographic at 75.4 million, surpassing Baby Boomers. They too are attracted to job opportunities and the ability to live in walkable neighborhoods where they can easily live, work, and play.
At the same time, the cost of living in the city is prohibitive for many Millennials, who still struggle to pay off student loans while covering the high cost of living in the city. Most Millennials end up with roommates or sharing bedrooms in order to afford an apartment in the city; still, there remain a significant number who are priced out of the urban market.
Enter the micro-unit.
A Small Solution to a Big Problem
Faced with demand from all sides, some investors took inspiration from the tiny house movement. Though tiny homes are usually meant for rural or suburban areas, their compact design and small footprint served as the ideal model for space-starved city investors.
Hence micro-units were born.
These compact apartments are meant for one or two tenants, and are located in dense neighborhoods where space is scarce. They range in size from 260 square feet to 400 square feet, and generally include built-in furnishings, though kitchens are minimal.
In order to up their appeal, investors are adding top-of-the-line amenities like fully equipped common kitchens and dining rooms, rooftop gardens, professional gyms complete with trainers, and lightening fast WiFi.
The smaller size and cheaper rent enable Millennials to enjoy urban living without needing to worry about rent or paying for a car. Baby Boomers, on the other hand, appreciate the minimal care these units require in comparison to the time-intensive full size properties they juggled for most of their lives.
Micro-units are Revitalizing Downtown Centers
While the retail downturn has left businesses struggling to find their place, micro-units are slowly bringing new life into once-depressed areas.
The size of the apartments and the proximity to the city center means more tenants are outside experiencing all the neighborhood has to offer.
Although many people look toward the tiny house movement as the solution to affordable housing and sustainable living, tiny homes face considerable opposition – often unintentional – in the form of numerous city regulations designed to limit trailer homes and similar housing.
Micro-units, despite the fact that they qualify as multifamily housing and are often part of a large apartment complex, face similar roadblocks.
For example, come cities have a minimum space requirement for apartments. Although these regulations are sometimes based on the number of people in an apartment, they often don’t take into account the special design and minimal lifestyle that micro-units represent. As a result, micro-units sometimes fall under the category of temporary or mobile housing, both of which require special zoning.
Developers also face the challenge of balancing energy efficient design with handicapped and zoning regulations… all while ensuring each apartment appeals to prospective tenants.
What to Look For
Investors considering micro-units should make sure to do their due diligence when planning the ideal site for a micro-unit property.
Of critical importance is the location of the micro-apartment development in relation to city life. Since tenants are primarily interested in live -work-play complexes, any planned construction must be close to transportation, restaurants, shopping, and other attractions.
At the same time, investors should be conscious of the potential pool of tenants and competition in the area; even if there are a large number of Baby Boomers and/or Millennials in the area, not all of them will feel the need or be able to move to an urban area.
Advantages for Investors
Micro-units require less planning and a lower investment than other types of multifamily properties. Even if new construction ends up being prohibitive, renovating older, larger apartments or re-vamping failed retail establishments is still entirely feasible.
Residents of established neighborhoods are less likely to resist this type of construction as it is less disruptive and often a good way to breathe life into older neighborhoods whose businesses have moved to trendier areas.
At the same time, the consistent demand for this type of housing virtually guarantees low vacancies, as their affordable prices, proximity to urban centers, and varied amenities means micro-units are ideal for those desiring a steady source of reliable income
In addition, since there are more tenants per square foot, investors can improve their NOI more quickly, even when you take into account the cost of adding amenities.
Despite the planning and foresight necessary to create micro-unit developments, investors who are careful to pick a good location and use high-quality materials can certainly result in excellent profits and long term value.