Are micro-apartments the next big thing?

Though it has a footprint of just 200 feet, the micro-apartment is raising sizable questions. “Could micro-apartments solve the affordable housing crisis?” “Are micro-apartments a revolutionary or exploitative trend?”

Last week, we talked about the tiny house movement and its potential returns for investors. In this two-part series, we’ll tackle micro-apartments: What they are, who’s renting them, why they’re poised to meet a vital need in certain cities, and why our industry should be paying close attention.

What is a Micro-Apartment?

Micro-apartments are smaller-than-average studios intended for a single resident. Ultra-efficient design packs a kitchen, bathroom, and other necessities into a unit of 200 to 400 square feet, while high ceilings and large windows create the illusion of space.

Many micro-unit buildings provide common areas where residents can relax and socialize. Some are designed for co-living, in which your bedroom is private, but all other amenities are shared with other residents. Thriving communities, appealing amenities, and prime downtown locations balance out micro-apartments’ small size. With the building as their living room and the city as their backyard, residents often only return to their rooms when it’s time to go to bed.

A prime example is Carmel Place, located in the Kips Bay neighborhood of Manhattan. The building has a footprint of just 4725 square feet. Its 55 modular micro-units are 260 to 360 square feet each; each boasts 9’8” ceilings, 8’ sliding windows, and Juliette balconies. The building has a large lobby, a gym, a roof deck, and multiple lounges and community rooms to be used as gathering places, as well as storage space for each unit. A live-in community manager plans barbecues, guest speakers, and other social events. The majority of units cost between $2440 and $2910 per month, which includes a private bedroom, bathroom, and kitchen; an app-based butler service; Wi-Fi and cable; and custom furniture. In addition, 8 units were designated for homeless veterans; the remaining 14 units set aside as affordable housing received over 60,000 applications.

Who Lives in Micro-Apartments?

The target audience for micro-apartments is single twenty-somethings with relatively lucrative jobs in the city. These are the residents who are willing to trade square footage for a vibrant, convenient location; who live alone and haven’t yet accumulated many possessions; who can afford the moderately high rent costs; and who spend the majority of time at work or socializing outside of their apartment.

These young renters generally stay for a year or two as they start a new job or move to a new city, then move on to larger units. As you might expect, these micro-units aren’t roomy enough for families; however, they’re also too expensive to be used as pied-à-terre units or affordable housing (more on this issue later).

Micro-apartments’ occupancy rates and rent per square foot currently outperform those of regular units. It remains to be seen whether this indicates a huge untapped market or a niche trend. However, nearly 1 in 4 renters of conventional units express interest in renting a micro-apartment. They’d be willing to sacrifice space for 20-30% lower rent, a highly desirable location, and the ability to live alone.

82% of current micro-apartment dwellers weren’t intentionally seeking out smaller units. Rather, location was the deciding factor for 97% of these renters, in addition to factors like proximity to work and public transit; neighborhood amenities; the ability to live alone; and price.

In comparison with conventional renters, they’re happier with their apartments’ locations, as well as their amenities and features. However, they’re less happy with their units’ floor plans and perceived value for the rent they pay. They renew their leases 41% of the time, compared with 57% of conventional renters; those who leave do so because of high rent costs and (understandably) the need for more space. However, 37% of micro-apartment tenants would consider purchasing their units given the chance.

What’s the Appeal of Micro-Apartments?

Why are young professionals interested in micro-apartments? In comparison with previous generations, Millennials are less inclined to stay in one location or one career in the long-term. They’re waiting longer to settle down, so they’re living alone longer. They want to live, work, and play in the heart of the city. The best case scenario is to find a studio apartment in a vibrant neighborhood that’s convenient to work, and also allows them to spend their free time how they choose.

In addition, many Millennials are attracted to the concept of co-living because of the community that many micro-apartment buildings provide. A key example is Havemeyer, located in Brooklyn’s trendy Williamsburg neighborhood. The building houses 51 residents throughout 12 suites. The lower-than-average rent includes a private, furnished bedroom, plus shared lounge rooms, bathrooms, laundry rooms, and kitchens stocked with supplies. What sets Havemeyer apart is that it invests a great deal of resources into community management to maintain a stable cohort of residents in the long-term. Four residents act as “house leaders” within the building, responsible for running events, stocking supplies, and resolving issues—the grown-up equivalent of a college RA. The building’s management company even runs a vacation home in The Berkshires to give residents the chance to build relationships during a weekend escape.

Do Micro-Apartments Present Any Investment Opportunities?

If micro-apartments are showing up in your city, should you jump at the chance to purchase and rent one out—or does their niche appeal make them too risky an investment?

National Real Estate Investor believes that while micro-housing isn’t for everyone, it will occupy a stable segment of the rental industry, particularly in cities where a thriving tech industry is attracting a Millennial workforce. Existing micro-apartments have higher occupancy rates and rental prices than conventional units—and that’s for amenity-loaded luxury units that only a percentage of renters can afford. If those buildings are fully leased within 2 weeks, with tens of thousands of applications being submitted for a handful of units, more affordable apartments in key locations are on track to fill up even faster. So keep an eye on the construction of micro-apartments in top cities like San Francisco, Los Angeles, Seattle, Boston, and New York—while the barrier to entry might be high, the potential pay-off could be enormous.

Property management is also being reincarnated in a different form for the era of micro-housing and co-living. Real estate start-up Common (which owns Havemeyer) has launched 9 properties around the world since 2015, working in concert with developers to design apartment buildings conducive to co-living. If the trend doesn’t last, however, the units can be converted into a more standard floor plan with relative ease. Common acts as the property manager, providing utilities, cleaning services, and community management. They recently received over 10,000 applications for 100 beds without spending a single cent on marketing.

The missing pieces of the micro-apartment puzzle, however, are affordability and availability—and as any resident of Boston or New York City can tell you, the apartment system is at a crucial impasse in this regard. We discuss this at length in Part II of our micro-apartment series: Micro-Apartments Could Solve the Affordable Housing Crisis—If We Let Them. You won’t want to miss the answer to this critical question.

In addition, we bet you’ll enjoy last week’s piece on the tiny house movement—another burgeoning housing trend with a small footprint but a big impact. Happy reading!