National Apartment Report: June 2016

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Graphic: Where is rent increasing and decreasing the most?

National Apartment Report

Data provided by ABODO – Data based on apartments available to rent

Some Millennials Opt For “Micro-Units” Over McMansions

Developers are recognizing that bigger isn’t always better when it comes to building new apartment units. The emergence of smaller “micro” apartments is proving to be a big hit with renters.

Rental housing is clearly taking a bigger bite out of wallets these days. New York state leads the country in the highest rents with current rates averaging $2,040 per month for a one-bedroom, according to ABODO. Rents have been rising faster than the rate of inflation, and that pace is expected to continue this year with effective rents forecast to rise a further 3 to 5%. Some metros are taking even bigger jumps forward. Cities that saw the biggest monthly gains in rent as of June 1 include Phoenix at 13%; Bakersfield, Calif. at 10% and Chicago at 8%, according to ABODO.

Developers are continuing to deliver new Class A apartments. Yet some are presenting an alternative by downsizing unit size. One of the big drivers behind that trend is cost. Developers need to make the numbers pencil on rents in order to justify the higher construction and land costs, especially for projects in very dense urban areas. In many cases, the micro units allow developers to charge a higher price per square foot, and still present units that are affordable to a wider pool of potential renters.

Transwestern Development Co. recently announced plans to build micro units in downtown Austin. Its planned Indie Apartments will feature 139-units and a 2,500-square-foot restaurant. The micro units consist primarily of 350-square-foot studio units and 520-square-foot two-bedroom units. The fully furnished apartments aim to maximize space by utilizing built-in storage units and flexible furniture systems such as Murphy beds and convertible tables. The property also will feature large community spaces, including an outdoor courtyard with fire pits and outdoor televisions. The project is scheduled to break ground this month with an opening date of August 2017.

The smaller units appeal to Millennials who like the convenience of urban living, but don’t have the means to pay the bigger rents associated with full-size units. “Younger generations like millennials have personal incomes that aren’t growing as fast as rental rates in most areas, yet they want to live in the middle of restaurants, bars and entertainment areas,” said Transwestern Vice President Josh Delk in a company announcement about the new project. “This project will answer that growing demand for more efficient, affordable living space that is located close to numerous amenities,” he added.

Micro units have been popping up in major metros such as New York City, L.A. and San Francisco where housing costs have been soaring. Yet projects also are emerging in smaller cities across the country. For example, Arcade Providence is a mixed-use development in downtown Providence, R.I. that includes 48 micro-loft apartments that range in size from 225 to 800 square feet. The property, which opened two years ago, is fully occupied and has a wait list. To satisfy the growing demand, the city recently awarded $3.5 million in development tax credits to support the development of 100 additional micro lofts. The smaller units also appeal to renters who are opting for a simpler lifestyle and/or want to lessen their environmental impact.

It remains to be seen just how deep the renter market is for these micro rentals. However, the smaller units are a sign that developers may be getting creative in order to set themselves apart in an increasingly competitive marketplace. A robust construction pipeline is continuing to add to available supply in many metros. A 2016 Multifamily Investment Forecast published by the real estate services firm Marcus & Millichap is predicting that new construction will rise 14% this year with a total of 285,000 new units delivered. As competition heats up, developers may be more motivated to deliver a product that appeals to a bigger audience and also acknowledges the changing preferences among some of today’s renters.