Out of the 6,221 units that have been added to the Twin Cities housing stock in 2018, 1,635 fall into the micro unit category. The micro trend also shows no sign of slowing down with 813 micro units already slated for development in 2019. For the purposes of this article, we will define a micro unit as any studio below 500 SF and any 1-bedroom unit below 600 SF.
The micro unit movement originated in the most expensive, coastal rental markets, such as: San Francisco, Seattle and New York City. In these markets, it is not uncommon for micro units to be well below 400 SF and cost upwards of $3,000 per month.
Micro units are designed to service the growing number of young professionals who want to live in downtown neighborhoods, but find themselves priced out of the luxury, new construction apartment buildings that populate many central business districts. From a rental rate perspective, micro units can be seen as an alternative to older construction apartments, which often lack the modern finishes and amenities that millennial residents desire.
A large demographic factor contributing to the viability of micro units and elevated demand for studio apartments in general, is millennials' propensity to delay marriage and thus household formation. Since 2000, the average age of marriage for an American man has risen by 2.4 years to 29.2. The same can be said for women, whose average age of marriage has risen from 25.1 to 27.1 over the same period. The result is a glut of individuals that are looking for a cost effective, temporary housing solution that will hold them over until they are ready to form a household and commit to a permanent living situation.
For developers, the boom in micro unit development is as much about millennial demographic trends as it is about where we are in the economic and development cycles. With 2019 marking the 10th year of one of the longest bull real estate markets on record, Twin Cities developers have been hard at work adding 35,407 units to the apartment market.
At the beginning of a real estate development cycle, opportunistic builders have a large selection of sites to choose from. These sites may become available for many reasons, including rezoning that was implemented during the recession or as a result of defunct businesses that did not survive the economic downturn. As the stock of large parcels are developed, late cycle builders are left with an inventory of smaller, more challenging sites. To draw value out of these sites, builders must either go vertical to add more units than would be allowable under current zoning or draw more rental income out of every square foot of the development – thus, micro units. In the case of the former, the Twin Cities have seen a significant increase in tower style apartment proposals in 2018, with five apartment towers currently under construction in downtown Minneapolis. As for the latter, micro apartments have been a viable way for developers to draw over $3.00 per square foot rents, from units with standard finishes, on less than ideal sites.
Building micro units can be seen as a calculated risk, as no one knows how demographic trends may affect demand from renters in the future. Perhaps micro apartments will become the new standard of urban living, maybe some projects will be converted into hotels. The only certainty is that they have arrived in the Twin Cities and are actively filling a void in demand that was previously unaddressed.
Colliers International | Minneapolis - St. Paul
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