Developing Furnished Micro Units, for Profit and Non-Profit
November 13, 2018
Carmel Place Exterior, New York City (nArchitects)
When we wrote about the uptick in the appearance of co-living developments across the country last month, we explored some of the reasons for their popularity with occupants: all-inclusive services and amenities — like on-site gym/pool, free wi-fi, linens and weekly housekeeping, etc. — plus a built-in sense of community, with shared space for both work and social gatherings. Aging Baby Boomers, young freelancers, digital entrepreneurs, empty nesters leaving big suburban homes to return to life in the city — those who opt for the co-living lifestyle seem willing to pay a little more to live in tiny apartments when the units come with all these added benefits.
Real estate developers investing in micro apartments are reaping the benefits, too; especially those who have taken time to understand the housing needs of the community and have conducted research to determine the potential return on investment. A developer considering a micro-unit project might be tempted to compare the costs of constructing a single-family home against another with identical features and finishes but with fewer square feet, but when trying to calculate ROI for the development of micro apartments in multi-family buildings, cost comparisons for unit sizes get more complicated.
In multi-family dwellings, constructing smaller units results in more units per building, which means a higher overall cost to the developer for additional kitchens and bathrooms. One case study estimated these additional costs run between 5-10% per square foot. But smaller, more efficiently-designed units are commanding more revenue per square foot than traditional apartment layouts. The increased cost of construction and additional operating expenses are easily offset by the 25% increase in revenue per square foot that occupants have demonstrated they are willing to pay.
Where developers have shaved off a few square feet while maintaining a high level of aesthetics of the unit, the financial rewards have become evident. In 2014, Weissman Equities renovated a five-story walk-up in New York City’s Harlem neighborhood where annual rents averaged roughly $35 per square foot. Upon opening, the furnished 150-225 square-foot micro units were fetching $70 per square foot—double the local average and well above original projections.
Modeling the development, operating costs, and correlating rents for a 160 square-foot micro unit with shared bathroom and kitchen, Furman Center concluded that these units could be rented for $840/month – a rent considered affordable to someone earning 51 percent of the area’s median income — and still remain profitable for the developer.
Rendering of Nohona Hale Micro-units in Kakaako (Hawaii), an EAH Housing and Bronx Pro development.