Micro-Apartments Could Lower Office Vacancy And Provide Critical Housing Supply In Houston

The Pew Charitable Trusts and Gensler took on two of the biggest problems facing Houston’s real estate market today and produced a report on what they say is an affordable, realistic solution: tiny apartments.

With a focus on the housing shortage and affordability crisis, as well as the high vacancy rate in Houston’s office market, the report released Tuesday lays out a road map to converting decades-old Downtown Houston office buildings into residential buildings with dorm-style micro-apartments.

The duo estimates that with “light subsidies,” a developer could see an 18.5% return on investment five years after converting a prototypical 24-story building built before 1974 into a 1,140-unit co-living building. 

“It seems logical, but office residential conversions have not really taken off because the layouts aren't quite right,” said Alex Horowitz, project director for housing policy initiatives at Pew Charitable Trusts. “A lot of the time, the cost per SF is too high, and it's great when it works, but it's not at the point of making a real dent in our shortage of 4 to 7 million homes in the U.S.” 

An oft-cited obstacle in converting office buildings to residential is their layouts, which tend to have large floor plates, with windows only on the outer edge. Windows are a requirement for all residential bedrooms.

Pew and Gensler suggest this problem is surmountable with micro-apartments lining the edge of the floor plates and shared amenities, including kitchens, living rooms, bathrooms and laundry facilities, clustered in the middle.

The units would be 141 SF to 227 SF, well below the average studio apartment size of 440 SF. The rooms would include an extra-long twin bed, a nightstand, a desk and chair, some storage, a microwave and a refrigerator. 

These would command rents of about $700 per month.

The study said there is a significant demand for this type of housing in Houston. There are about 611,000 renters in the Houston area, and 40% of them are single-occupant renters, American Community Survey data shows. 

About 12% of those single-occupant households, or 30,000 people, earn between $20K and $30K a year, which means they could afford $500 to $750 a month in rent without being cost-burdened.

More than 50% of renters in Houston qualify as cost-burdened, spending more than 30% of their income on rent. Houston’s median rent was $1,297 in November, one of the lowest among major cities in the U.S., yet 26% of renters are severely cost-burdened and spend more than 50% of their income on rent. 

The study says micro-apartments could create a supply of housing at an affordable price to these renters. It could also minimize underutilized office stock that threatens the vitality of central business districts and impacts municipal revenue generation. Cities rely significantly on commercial property taxes to fund local budgets — 42% of the city of Houston’s revenue came from commercial and residential property taxes in 2023.

The existing deeply affordable housing supply in Houston is usually far away from where the jobs are, according to Gensler Strategy Director and principal Wes LeBlanc. Putting these projects Downtown would create affordable housing near many different types of jobs and public transportation, he said.

A project design in the report includes three floors of parking, one floor of Class-B office space and building amenities, one floor including a lobby, management office and retail, and 19 floors of residences. Houston’s central business district has no parking requirements, and the city has no zoning code.

“The reason we chose Houston [to study] was because A, it has a high office vacancy rate, and we're prioritizing cities for high office vacancy rates,” Horowitz said. “And B, because Houston doesn't have regulatory barriers to these conversions … Most cities have something in their zoning code or building code that makes these conversions very difficult and sometimes impossible.” 

Out of the approximately 40M SF of office space Downtown, about 17M SF worth is 30% or more vacant, Pew and Gensler said. The report used the prototype of a 67% vacant building built prior to 1974. That building type makes up just 25% of that 17M SF.

Buildings older than 50 years qualify for the state’s robust Historic Tax Credit program, which is one of the most generous in the country, according to the report. It’s possible that the same formula would work for newer buildings, but at a higher subsidy rate, LeBlanc said.

Financing remains one of the biggest deterrents to converting office buildings to residential. The study estimates a construction cost of $134K per unit, which is roughly equivalent to the cost of building a traditional studio apartment in Houston that could be rented at market rate.

With no subsidies, the levered return on investment for the proposed project would be -6.6% after five years. To get to a 1.5% positive return, the developer would have to pay no acquisition costs and get a 15% subsidy.

An 18.5% return on investment would require no acquisition costs, a 15% subsidy, a 4.75% interest rate on debt and a 75% loan-to-value ratio.

These subsidies are comparably light, though, Horowitz said.

A converted micro-apartment in Los Angeles would cost $240K to build while a traditional studio apartment costs about $500K.

“So you need $380K in subsidy,” Horowitz said. “You can get triple the housing for the same dollars [as building traditionally].” 

There is no existing product in Houston quite like the one proposed in the study, but the researchers said they hope the idea will spur innovation.

“This is a starting point,” Gensler Senior Living Leader and principal Brooks Howell said.

Each conversion project is different, and some developers have already completed office-to-residential conversions in Downtown Houston. But this study offers another creative solution that can serve populations like seniors, who only get $2K a month in Social Security, he said.

“This is a way of creating something that is clean, managed and maintained for a low price,” Howell said. “So that if you're only making $2K a month, you actually will have some money left over every month to live on.”