High development costs, limited land availability, and increasing demand for multifamily units have led to increased rents and altered renter preferences. As consumers search for more accessible housing in major metros and cities look to address the affordable housing crisis, a new trend has emerged —micro-unit apartments. These tiny living quarters are getting the attention of the country’s top investors and developers as residents jump at the chance to live a minimalistic lifestyle in a purpose-built home. As more metros face land scarcity and lack of housing, micro-units may be the solution for over-built markets.
What Is a Micro-Unit?
Most commonly found in densely populated metros, a micro-unit apartment is typically less than 400 square feet with a full-functioning bathroom and kitchen. These types of apartments are made to be efficient, not wasting one inch of space. Oftentimes, the units will have hideaway storage, modular furniture, and a murphy bed that goes into the wall when not being used. The majority of tiny units are eco-friendly and are in a complex with several amenities, similar to a high-end apartment building.
A micro-unit complex can include a community kitchen, car-sharing discounts, communal lounges, and pet perks. – Apartment Guide
Residents enjoy a simple lifestyle, and because the units are built sustainably, utilities cost much less than a traditional home or larger apartment. Micro-units are typically listed below-market rents given they are much smaller than regular apartments. The lower rent allows consumers to be in a better location, as these units are typically in urban locations that average-size apartments are often out of budget. Although there are many micro-unit perks, rent in some markets is outpricing traditional multifamily units due to heightened demand. Some markets that are performing well in the micro-unit sector include Los Angeles, Seattle, San Francisco, and Washington D.C.
Investing in Micro-Units
The allure of micro-units for investors is the idea of adding more units per square foot. Although larger one-bedroom apartments can provide high rent profits, they limit the property owner’s customer base as one-bedrooms can be too costly for urban renters. Larger units also take up valuable and costly space, a disadvantage in dense markets that require developers to make the most out of limited square footage.
A micro-unit negates this challenge by creating an opportunity for developers to build more units in the same amount of space. They also allow an average-income individual to live in the multifamily complex for an affordable price, but still pay more per square foot. This type of residential property is a great solution for both multifamily owners and consumers as the higher rent per square foot equals higher returns for investors and the small square footage makes the unit affordable.
Micro-units are one of the best examples of a win-win in residential real estate, to date. Renters get exactly what they want, the best location, privacy, and their own unit, while operators get exactly what they want – the highest rent per square foot. – CrowdStreet
The exact price for a micro-unit varies by location but is usually about 20 percent to 30 percent less than the market’s average rent for a studio space. For example, luxury micro-units in Manhattan average above $2,500 per month and are still below market expectations, but in Nashville, micro-units average around $1,000 per month. Overall, micro-units fall below the national average rent for a one- and two-bedroom apartment, both of which have seen historically high year-over-year growth since 2021.
To note, more units per square foot will require higher development and operating costs. The more units within the building, the more it costs to run the multifamily property. These expenses are null and void for most investors, though, as the higher rent per square foot makes up for the extra costs. In turn, an investor’s return is higher with micro-units than with a traditional multifamily complex.
Will this Trend Last?
Since COVID-19, many consumers have opted for the more private, minimal lifestyle that living alone brings, but increasing rent rates have made this preference hard to accommodate. Micro-units offer a great location, efficiency, and sustainability, all for a more affordable price for the renter and a higher return for the landlord. As major cities continue to struggle with affordable housing and land constraints, micro-living will grow in demand and, more importantly, in need. Although real estate trends come and go quickly, planting capital into smaller units and high-end micro-unit communities is predicted to stay stable and profitable as consumers want to live large while downsizing continues to flourish.
