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Quarterly Review - Bigger amenities, smaller units: trends in multifamily
10/6/2017

When he sang, “For the times, they are a-changin’,” Bob Dylan was predicting the future. As the world changes, multifamily real estate is changing right along with it. 

While buildings are bigger, units have shrunk. People are willing to squeeze into a smaller and smaller space, as long as they get a great location and amenity package. 

We’re not just talking about “micro-apartments.” The average size of newly constructed units has declined 8% over the last decade, according to Yardi Matrix data, with the most shrinkage in apartments that were already the smallest. The average studio shrank to 504 sq. ft. in 2016 from 614 sq. ft. in 2002, while one-bedrooms fell 5% to 752 sq. ft. Two-bedroom units defied the trend, expanding 1% to 1,126 sq. ft.   
 
The move toward smaller units may reflect a change in priority for Millennials, who spend less time at home and more time out socializing. Does a recent college grad in a big city really need more than a kitchenette and a small fridge? Recent experience here in New York City suggests a lot of them don’t.
 
NYC now allows units with less than 400 sq. ft. Of course, Millennials aren’t the only target market – a lot of new construction targets low-income renters or veterans so developers can qualify for tax subsidies.  
 
But regardless of who’s renting, demand for smaller apartments has changed the way landlords do business. I led the financing of Carmel Place, New York City’s first micro-unit building, a great case study for this trend. Carmel Place’s 55 studios range from 260 sq. ft. to 360 sq. ft. but come complete with a full-size amenity package that includes a fitness center, rooftop patio, and all-inclusive services such as cable, wireless Internet, housekeeping, and Hello Alfred (a personal butler service). 

The amenities arms race

As units shrank, amenities grew. 
 
Think of it from the property owners’ perspective: Instead of investing a lot of capital to renovate every unit, they can provide “upgrades” by offering new conveniences. In some cases, these amenities translate into rent premiums. A study by the National Apartment Association reported that 46% of apartment dwellers would pay extra for fitness classes, while 42% would pay up for walking trails or tracks. Given the cost of gym memberships, the ability to exercise without leaving home is a huge plus.
 
As a sports fan, I see outdoor TV and grill areas as important features. Yoga studios, business centers, game rooms, and pet grooming salons are becoming more common in my market. Clubhouses, common areas for socializing, landscaping, swimming pools, and playgrounds, cited by the NAA study as top community-wide amenities, are also popular in a variety of markets.
 
Some of the new convenience features may stem from a desire for social interaction – or from a landlord’s desire to profit from that interaction. According to Humphreys & Partners Architects, renters with friends in the same community are 25% more likely to renew their lease.
 
Location-based amenities could become increasingly popular as urban residents reduce their reliance on automobiles. Renters who don’t own cars will appreciate special Uber and Lyft loading zones or locations across the street from a Trader Joe’s or Whole Foods. These days, more and more urban renters – particularly Millennials – don’t drive. 
 
According to the U.S. Census Bureau, in 2015, 10.6 million households did not possess a car. That’s up 5% from five years earlier. Many of those new no-car households were found in large cities. The 2016 NYC Mobility Report estimates that despite an increase of 370,000 residents from 2010 through 2015, 45,000 fewer vehicles entered the city’s central business district on the average weekday in 2015 than in 2010. During that same period, subway trips rose by 159 million a year. 

The lender’s perspective

From a financing perspective, the amenity explosion makes it easier to deal with the angst that can accompany micro-unit deals. Some lenders find it off-putting to see per-square-foot rent 50% higher than what’s normally charged for larger units. But when we factor in greater amenities – including some that come with a fee built into the rent – lenders get more comfortable. 
 
It seems renters are also becoming comfortable with less space. After all, buildings designed with micro-units in mind might feature Murphy beds, fold-out tables, and more efficient storage, offering a more livable experience than a 100-year-old building chopped up into studios 50% larger.
 
At 400 sq. ft., every inch matters. And if developers make those inches appealing enough, the go-small trend will continue.

About the Author: Michael Chavkin is a managing director for M&T Realty Capital Corporation in New York City. He focuses on Freddie Mac and Fannie Mae loan origination, with expertise in financing cooperatives and micro-unit properties.


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