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Blog: Thinking Small for Big Profits—Microapartments and ROI

Tiny apartments have long been the norm in cities like Tokyo and Paris. But recently, mini apartments (400 square feet and less) have been making big waves in the U.S. 

Even as wages have stagnated, downtown living has made a comeback across the country, resulting in a housing shortage in urban areas. Microapartments offer city dwellers the convenience of downtown living at a price they can afford. Plus, living small has become a hip social trend, as reality shows like HGTV’s “Tiny House Hunters” and the Museum of the City of New York’s blockbuster exhibit "Making Room" can attest.

Microapartments: Win-win appeal

As much as tenants appreciate the smaller rents they offer, microapartments are as popular among urban property owners, for whom the returns are anything but small. 

For one, microapartments are highly rentable. Small apartments have been “flying off the shelves,” according to Erica Champion, senior real estate economist with CoStar's Property and Portfolio Research forecasting and analytics division. Combine their low vacancy rates with their higher rent-per-square-foot, and it’s no wonder mini-apartment units are springing up like crazy in cities from Seattle to New York.

“Typically a developer can stand to make roughly 56 percent more on a per-square-foot basis when developing a microapartment complex,” says Michael Hobbs, president of PahRoo Appraisal & Consultancy in Chicago. 

That’s enough to make any investor take notice. But is there a catch? As in anything else real estate-related, that depends on your location. 

“Our clients haven’t reported seeing any increase in operational expenses per unit in microapartment buildings,” says Nat Kunes, VP of product management at AppFolio, a software solution for property management professionals. “That said, converting a building to microapartments requires some capital and should be evaluated against the local market for demand to ensure it will pay off.”

Which conditions make a location ideal for microapartments? 

Here are a few:

1.    High demand for housing. Where rents are high and space is at a premium, microapartments do very well. 

2.    Access to public transportation. Adding units may not be possible in locations where a car is a necessity if there is not adequate parking space nearby. 

3.    Local amenities. Because many microapartment dwellers don’t own cars, being within walking distance from restaurants, parks and other facilities is important to them. 

4.    Smaller family units. Microapartments are more attractive to singles or couples than to families (for obvious reasons). They are especially popular among millennials, many of whom are happy to trade material comfort for a chance to be close to the action. Seniors, too, often appreciate the simpler, pared-down living these tiny apartments afford. If your property is in an area with a high population of such people, it will likely do well when converted to micro units. 

Impact on the neighborhood 

As with any real-estate trend, microapartment development is not immune to backlash. In Seattle, some residents have complained that the units increase population density so much that neighborhoods suffer. 

Microapartment complexes do affect the surrounding areas, so it’s important to be sure that neighborhood support systems can handle the increase in population. Zoning boards and property owners should consider the impact on parking, grocery stores, restaurants and public transportation. Of course, not all impacts are negative. Microapartments can represent a real boon to local business. 

Unless microapartments are already common in your city, your local building and zoning codes may not be up to speed yet with the requirements of these smaller dwelling units. You might have to do some talking with your zoning board and code officials. Be willing to educate where appropriate. 

When remodeling your property to include microapartments, you must also consider whether the cost of redesigning an existing apartment building to create microapartments is worth it.

Again, it depends on location, but in most supply-constrained markets, the answer is likely yes, according to Kunes. “Ideally you would want to do the conversion in the most economical fashion and look for what people in the market are desiring in terms of amenities. Can you skip a dishwasher? Install a shower instead of a tub? Ask yourself these types of questions,” he says.

With tiny spaces, design is king. Here are some things to consider incorporating:

•    Dual-purpose features. Any time you can get one part of the apartment to serve two or more purposes, you have a score. For example, drawer units built into a stairway up to a loft. 

•    Multifunctional furniture. Think pull-out beds or a desk that converts into a table. 

•    Space-saving appliances and equipment. Stacking laundry units, mini appliances and pull-down tables. 

•    Vertical space optimization. Loft units are popular, as are vertical storage units. 

•    Communal spaces. Many microapartment buildings feature communal kitchens, lounges, gym facilities, etc. 

Do you own or manage microapartment units? What is your experience? 

——

Anne Michelsen is a freelance writer with expertise in areas including construction, small business management and sustainability (www.thegreeninkwell.com).

Be sure to join the Lowe’s ProServices LinkedIn Group to read additional content and interact with other Construction/Trade and MRO professionals.

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