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Are Micro Units the Future of Housing?


[Updated: Jun 02, 2020] Feb 20, 2020 by Liz Brumer
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As housing costs rise and the demand for affordable housing remains high, some cities are looking to micro units as a possible solution. Micro units, which are small dwellings typically 350 square feet or less, may be an answer to the affordable housing crisis providing quality, affordable housing within a smaller footprint.

What is a micro unit in real estate?

In real estate, a micro unit is self-contained housing ranging between 200 and 400 square feet, although size classification of a micro unit will vary based on its location. Micro units come complete with a kitchen or kitchenette, bathroom, and living or sleeping space in a size comparable to a studio apartment in Paris, Tokyo, or Rome.

However, developers and designers in the United States are innovatively creating multiple solutions to make microunits feel larger and more livable, including flexible furniture systems, high ceilings, oversize windows, built-in storage, and movable kitchen islands, while remaining compliant with the Fair Housing Amendments Act, which determines standards of quality housing.

How are micro units impacting the real estate market?

According to a 2015 study conducted by the Urban Land Institute (ULI), micro units are approximately 20% to 30% cheaper than conventionally sized units. These mini apartments are most popular amongst young, single working adults age 30 or under who are willing to compromise space for location, amenities, and cost savings.

Micro units are most popular in highly populated metropolitan areas like Portland, Seattle, San Francisco, Boston, Chicago, Los Angeles, Washington, D.C., and New York City, where housing affordability and space are at a premium. These smaller units (studio or micro units) statistically see higher overall occupancy rates than standard-size apartments.

Investing in micro units

For many, the appeal of more affordable housing in a city's prime location is worth the space savings, but not to everyone. ULI conducted a study that found 58 percent of those surveyed who live in a conventional housing unit would not consider living in a micro unit, even if there was a considerable cost savings.

While micro units are more expensive to build, you have more units per square foot, allowing for more rentable square feet and potentially higher income because of the total number of rentable units. In the space of a conventional 800-square-foot apartment, you can have as many as three micro units, which provides a higher overall net income per square foot.

According to ULI, micro unit tenants are less likely to renew than conventional tenants. As income increases with age or careers, or family or relationship statuses change, tenants are more likely to increase in unit size. Interestingly, around one-third of renters of micro units said they would consider buying the unit if available for sale.

Diversification is the safest way for investors to partake in this market. Look for real estate investment trusts (REITs) or investment companies that are building apartments with a variety of unit sizes to meet the growing demand for smaller or larger unit sizes for their tenants.

If the development is a micro-unit building, ensure the company is keeping the design and functionality of the units in mind while providing the tenants with an ideal location and amenities (including laundry and grocery stores), as well as appropriate pricing for the units. It may be advantageous to offer the units for sale at the end of the lease as an alternative way to retain income and increase returns.

Another common complaint from micro-unit tenants was a lack of storage space. Offering additional storage space, such as an on-site storage unit that can be made available for rent at an additional fee or included in the rent, may help increase renter retention and overall satisfaction.

Looking to the future

As of 2015, there were 3,501 micro units either built or planned and in development. More cities are starting to lower their required sizing for units to accommodate the need for more affordable central housing. It's likely the trend for micro units will only continue to grow as the demand for affordable housing increases. Before investing, conduct your own due diligence on the investment vehicle, market, demand, and company.

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