David Senden – Multifamily Goes Micro: Adding Amenities

Western Real Estate Business

September 12, 2015

Microsuites are popping up in urban cores throughout the West, proving that bigger is not always better.
Millennials are fueling yet another commercial real estate trend: the microsuite. Also referred to as micro-units or a”pod”ments, these tiny dwellings were designed with the trendy young professional set in mind, who seem to want it all. Only problem is, this postcollege, pre-six-fgure-salary group can’t always aford it all.

“These tenants need a place to sleep, eat and use the bathroom,” says Mike Smith, a principal at Lee & Associates- LA North/Ventura. “They don’t feel like paying more of their hard-earned paycheck for living space they don’t need. They are usually just starting out, so they don’t have the space requirements that those who are running a household would have. They will, however, pay a premium for their small space to have high-end fnishes and resort-style amenities or,at the very least, a fancy historic sign on top of their building.”

Downtowns throughout the Western U.S. have been brimming with fancy historic sign-showing buildings for decades. Now that they’ve attracted an entire generation of people – are at least their locations have – developers are taking notice as well.

While there is a solid subset of renters who can aford to lease a 700-squarefoot studio or a 900-square-foot one bedroom in the coolest downtowns, the demand for living space in popular urban cores has caused developers to think outside the bigger box. These smaller boxes, typically composed of less than 400 square feet, have many advantages for both parties.

First, it gives Millennials (and other population subsets who live alone and are unencumbered by families) what they desire: an afordable, 24-hour lifestyle in a pulsating part of the city.

“Millennials are the prime renter demographic, and they are increasingly attracted to urban living and the emerging live/walk/work/play lifestyle,” says Dean Zander, senior managing director of institutional investment sales for Berkadia in Los Angeles. “They have expressed a strong desire to live solo, and to stay mobile and independent, as well as liquid and fexible.”

Microsuites also provide a way for developers and landlords to increase the amount they’re netting each month in rent since they’re able to get more buck for less bang.“For developers and landlords, microsuites are extremely attractive because they can command a higher price per square foot,” says Janet D. Neman, senior managing director at Charles Dunn Company in Los Angeles. “A typical studio apartment is about 500 square feet, while a microsuite is typically sized between 200 and 300 square feet. With rents for microsuites just slightly less than rents for studios, more tenants are able to aford rent while the landlords collect more money per square foot than they could otherwise – and usually at a much higher density than with an alternative unit mix.”

Tech-Savvy Cities Lead the Way
As with most Millennial-inspired designs, the tech-centric cities were the frst to adopt this trend.

“Micro-units today are confned mostly to technology- or mediafocused coastal markets with high housing costs, such as Los Angeles, San Francisco, Seattle, New York and Washington, D.C.,” Zander says. “Among cities in Southern California, delivery of these units has been confned primarily to the beach cities, Hollywood and Downtown LA, as well as new urban cores, including North Hollywood and Playa Vista.”

These cities are leading the way, Zander believes, because their premium land costs and rising construction rates are forcing developers to maximize a project’s density while still delivering an attractive product. Neman has also noticed this trend taking shape throughout Los Angeles’ Silicon Beach and Downtown areas, where living close to one’s place of employment can result in substantial savings on time, gas and sanity.

“The trend is spurring development all the way west into Santa Monica and north into the entertainment hub of the Valley,” she notes. “The younger workforce especially encourages this trend. They want to live near their workplace to cut down on gas prices and transit time. They also want to live in areas that have active, pedestrian- friendly neighborhoods. Microsuites allow professionals of all ranks to be part of an urban lifestyle, whether that lifestyle is in Downtown Los Angeles, Koreatown, Santa Monica or Studio City.”

The Avalon in Koreatown is one example of a microsuite property that sells itself based on location. Of the 47 units, 20 are considered microsuites, ranging in size from 350 square feet to 360 square feet. The Avalon’s density means more residents are able to live near a bustling area of Los Angeles. The property is situated on Catalina Street, just a few streets north of Wilshire Boulevard, where residents have a variety of transportation, entertainment, dining and other services available to them.

Adding Amenities
The 92-unit Alder Flats in the First Hill neighborhood of Downtown Seattle is another successful example of microsuites at work. The units range from about 205 square feet to 455 square feet if there is an added loft, with rents ranging between $850 and $1,405 per month, and Wif and utilities included. This may seem steep for an apartment that’s less than half the size of a standard studio, but the building ofers a variety of in-unit and community amenities designed to make residents feel like they’re getting more.

The loft is one creative way to add space to otherwise cramped quarters, while foor-to-ceiling windows are another.

“Micro units need to be carefully designed,” says David Senden, a principal at KTGY Architecture + Planning in Irvine, Calif. “It is a little like a yacht, or RV design: no wasted space, a reason for everything, and ways to make the space do double and triple duty.”

With this in mind, high ceilings — which allow builders to go up, not out — can easily accommodate a separate sleeping space, just as foor-to-ceiling windows can act as an extension of the outdoor space surrounding the unit.

Alder Flats also features galley kitchenettes, a space-saving design that originally referred to the kitchens on ships that would have to be arranged efciently to maximize a limited area. The small unit size also means residents cannot allot space for a separate dining room table or eating area, as every square foot counts, and each nook is performing “double duty,” as Senden stated.

“There are more options available these days for compact appliances to help the kitchen play a less prominent role within the unit,” he continues. “Besides, no one eats at home when there are such good restaurants right around the corner. The idea is that the unit is a place simply for sleeping and showering. The rest of the time is spent working and socializing. Why waste money on space that’s not going to be used?”

Rather than put money toward that, Alder Flats invested in the common areas, adding a barbecue grilling station and large community room with a full-size kitchen for those rare times when a resident does want to cook. It also created a rooftop deck that overlooks Downtown, Mount Rainier and Elliott Bay. Bike storage was another important component of this project, since housing a bulky bike in-unit is out of the question, even for the most space-savvy resident.

Looking at Logistics
Building a microsuite project that satiates some of the demand for downtown dwellings may sound like a no brainer for developers, but these projects aren’t easy to get of the ground. One of the ironies of this trend is that land is so tight in these popular neighborhoods that developers oftentimes can’t give the people what they want, even if they wanted to.

“Finding land on which to develop new properties is the most challenging aspect, as the developments largely require new construction,” Neman notes. “There are some existing buildings that can be converted into microsuites, most notably small bachelor singles in buildings built just after the beginning of the 20th century. Usually, however, land must be bought fresh or an existing building must be demolished to make way for the new development.”

Developers must also deal with the cities, which can impose density limits, parking quotas and accessibility requirements on microsuite projects. Senden notes the latter can afect a bathroom’s design, making them larger than what would be ideal for such tiny spaces.

This can be small potatoes, however, compared to some of the ordinances created by cities with an infux of microsuites, like Seattle. The city contained 782 micro-units, with an additional 1,598 in the pipeline earlier this year — a much larger supply than any other city, according to a Seattle Times story released this past March. The Seattle city council responded to this supply by creating an ordinance stating all microsuites must contain at least 220 square feet, including a kitchen and bathroom. It also imposed minimum parking standards on all new projects going forward.

Once the land is found and cities are happy, developers are then tasked with making sure the project still pencils.

“If an existing building is demolished, current tenants must be awarded a repositioning sum to exit the premises,” Neman explains. “Microsuites generally provide great return on investment, but the investment itself can be competitive and costly.”

Zander believes developers who can stick out these challenges will be rewarded in the end, however.

“For the developer, they can realize a superior rent-per-foot premium for the smallest units,” he says. “From an investor’s perspective, the cost per foot will be dramatically higher than a standard property due to the achieved rent-per-foot metric, but the price per unit will be below the average. As investors and lenders realize more deliveries of micro-units will lease quickly and fnd an audience, any hesitation or resistance will vanish. As such, there is virtually no diference between the cap rate for a micro-unit development and traditional apartments.”