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Micro-Housing Boom: An Answer To The Affordable Housing Crisis?

Though national apartment rents are growing less quickly, they still exceed the average American's budget in some cities. One way developers are working to address this imbalance is by building micro-lofts.

MicroPADs  exterior

Micro-housing has gained momentum these past few years, particularly in denser markets, Yardi Matrix department of operations manager Doug Ressler said.

The concept is simple: Stuff as many miniature apartments into a building as possible in a market that caters to young professionals, charge less per unit and cash in on the profits. But the benefits aren't one-sided, Ressler said. 

"It's a win-win for both the provider and consumer," he said. "I think the key is they're being designed with the person in mind, in terms of what their needs are. So you're seeing a lot of functionality in a micro-loft that takes into account how people live and work in their offices."

An Answer To The Affordable Housing Crisis?

MicroPAD interior

Developers across the country are turning to micro-units to aid in the country’s affordable housing crisis.

“It’s either a mini-unit or the sidewalk,” Panoramic Interests’ Patrick Kennedy said regarding an ambitious project his firm is pushing to tackle the homelessness plaguing the country’s most expensive markets.

Its micro-units, called MicroPADs, average about 160 SF per unit. The San Francisco-based developer launched its first prefabricated apartment unit in 2013, but for the past 12 months the firm has been pushing to develop its first modular MicroPAD (which stands for Prefabricated Affordable Dwellings) in Berkeley.

Manufactured off-site, the prefab homes are about half the size of a typical 300 SF micro-apartment, leaving just enough room for one person. Each unit comes with a day bed, a desk, a kitchenette, a microwave, a bathroom/shower and a closet.

“This takes it to the extreme. They’re small, car-free and modular,” Kennedy said. “Those three things are going to make housing more affordable in cities where rents and costs of construction are astronomical.”

The business model is simple: lease the seven-story, 150-unit apartments to the city for about $1k/unit. Kennedy said MicroPADs cost 30% less than typical apartment development and take half the time to develop, as the modular steel boxes, often resembling shipping containers, are manufactured overseas. These buildings are typically built within 10k SF sites and can be erected above existing parking lots, to maximize limited space in already dense markets.

If it can get past the bureaucratic red tape and pushback from city officials who don’t favor the prefab model and unions that don’t appreciate the lack of cash inflow to their workers, Kennedy said the firm will expand and launch MicroPADs in Oakland, Sacramento, Los Angeles and San Francisco. “We’re long overdue for an innovation in this industry, probably 30 years overdue.” 

Millennials Trade Space For Amenities

San Francisco skyline
credit: Tony Webster
San Francisco skyline

It's a concept that works better for young professionals who have yet to start families, and landlords are offering amenities to appeal to Millennials: utilities and WiFi included in the rent, shared kitchen space and sometimes fully furnished apartments. But most importantly, these address two of the top concerns of Millennial renters, both in the U.S. and globally. Being close to work and public transportation and enjoying affordable rents outweigh the inconvenience of the lack of space in the 200 SF to 400 SF units.

"It's really [about] how much of your budget you can allot to housing," Ressler said. "Young professionals want to work and live along mass transit. I would look for a micro-loft type of concept that is near where I work."

Micro-Unit Hot Spots

Though micro-housing continues to gain momentum in San Francisco and the Bay Area, it was Seattle that led the way in micro-unit development in 2015 with 780 micro-units under its belt and almost 1,600 in the pipeline. That market slowed last year with more local government regulation, but the lack of affordable housing is causing the trend to resurface.

Minneapolis is picking up steam and may approve its third micro-housing project this year, should developer CPM Cos' proposal for a six-story, 75-unit apartment building be approved by the Minneapolis Planning Commission Committee, Finance Commerce reports. Yardi Matrix research found the Twin Cities market is becoming a Millennial hot spot, and declining unemployment and growing wages are boosting the market's appeal for investors, especially with Millennials migrating to the area thanks to promotions and high-paying jobs.