The Incredible Shrinking Apartment Unit

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SAN DIEGO-Apparently, size does matter for a growing number of apartment renters who are snatching up units that are smaller than most would believe to be desirable, said panelists during the session “Is Micro the New Macro?” yesterday during ULI's Spring Meeting here. Developers James Potter, chairman of Kauri Investments Ltd., and David Adelman, principal of AREA Real Estate LLC, said that renters of varying demographics are seeking space that many would call closet-like—some units as small as 100 square feet, according to Potter—and that the customer is demanding this space in urban markets near amenities and transportation.

Adelman spoke of projects his firm has completed along San Antonio's Riverwalk, where galley kitchens are the norm, the space is adaptable to a variety of furniture configurations and common-area amenities are highly valued. Every bit of space is put to use, from the boxing gym underneath the popular outdoor pool to the landscaped dog park to the community grills and dining tables in the courtyards. “Every nook and cranny is programed for usability,” said Adelman.

He added that the 450-square-unit apartments were the first to be rented, and some units in demand are as small as 380 square feet. Because the units are so small, the common-area amenities are especially important, and innovation in these is needed to discover exactly what will attract a particular renter—things like welcoming nearby food trucks to visit the complex regularly and creating a super-pet-friendly environment.

Potter said that the development of these properties “is about the customers, and they want different things going forward. This particular product class wants high walkability in urban areas, and they want to be close to amenities.”

Many of Kauri's apartment developments have no on-site parking because tenants don't even have cars—they walk, bike or take public transportation wherever they go. Buildings either feature small kitchens in the apartment units or community kitchens in a 30-room building. The typical tenant is either in his or her early 30s who is tired of sharing space, or someone who uses the space as a lodging place during a Tuesday-through-Thursday workweek before returning to their family home on the weekends. “This is customer service, and this is what people want,” said Potter. “Our goal is small projects that fit into an existing area. We don't advertise, and we don't even have a website yet. It's not for everybody, but it's where we're going.”

Adelman added that AREA spends very little on advertising these properties since it keeps costs down and raises the NOI.

Of course, there are challenges to the smaller or micro apartments. Sound-proofing is definitely a “customer issue,” said Potter, and lenders aren't eager to provide capital for a multifamily project without parking. But, he added, tenants like the flexibility of a 90-day lease. “We're not pushing for one-year leases.”

Adelman said some of AREA's smaller-unit buildings have parking maximums, and outdoor community kitchens will be the next big amenity trend in these types of properties. “We're trying to create 'sticky' real estate—something that's experiential and plays to the lifestyle of these communities.”

Housing was also the main topic of yesterday's keynote panel titled “Focus on the Future of Housing,” during which moderator J. Ronald Terwilliger, chairman emeritus of Trammell Crow Residential, led a panel discussion with Ed Brady, president of Brady Homes; the Honorable Henry Cisneros, former secretary of the US Department of Housing and Urban Development and chairman of CityView; and Nicolas Retsinas, director emeritus of the Joint Center for Housing Studies at Harvard University and senior lecturer in real estate at Harvard Business.

Terwilliger pointed to ULI research that showed compact mixed-use communities are what people from Generation Y through the Silent Generation (people born between 1931 and 1945) prefer. Those who work would trade a big house for a shorter commute, while younger people would be most likely to value public transportation.

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Cisneros said that with the number of people over the age of 85 projected to be 80 million by 2040, the current housing stock will not be equipped to handle them, so housing reform is extremely important. He and the other panelists also pointed out that Fannie Mae and Freddie Mac cannot continue to be the main source of funding for senior and affordable housing.

Retsinas said that even with reform, it would take between five and 10 years to implement the legislation. All agreed that private capital needs to step up and jump into the housing funding game, but Retsinas added that there are caveats. “If private capital takes up some of the oxygen in housing, it will demand a bigger return than the government. Plus, it's not low interest rates that are keeping private capital--it's that they don't know what they're getting into” given the recent housing bust, Retsinas said.

Brady pointed out that while multifamily properties have their place, homeownership is good for communities. “There has been found to be lower crime rates and higher [school] test scores in areas of high homeownership.”