Despite pandemic push for more space, micro units still hot with some developers. Zoning laws remain a hurdle.
By Ashley Fahey
Tampa Bay Business Journal
Published: Sep 13, 2021

Small is still big for some real estate developers, despite macro changes from the Covid-19 pandemic where "more space" has widely been viewed as a bigger priority in housing decisions.

Micro units, typically one-room residential units with smaller-than-average floor plans, have gained traction as a trend for more than a decade now. But in light of rapid rental-rate increases, especially in metro areas once considered affordable, some believe building small, efficient studios is an innovative solution for workforce housing.

The true definition of a micro unit varies. In some markets, it's not unusual to see units as small as 200 square feet. But in, say, fast-growing Sun Belt markets, which have historically had larger floor plans, a 400-square-foot studio may be considered a "micro" unit.

Keith Schwebel, founder and CEO of New York real estate firm KSNY, has spent much of his career building "micro" projects. Years ago, he founded Banana Bungalow, a hostel owner and operator. More recently, KSNY built the Arlo NoMad in Manhattan's Midtown South, a luxury boutique hotel with 150-square-foot rooms.

KSNY has now pivoted to residential microunits, with its 122-unit Nest project in Jersey City, New Jersey, in lease-up now.

"It's a way for young professionals to have their own apartment for half the price," Schwebel said, referencing the proximity of Nest in Jersey City to Manhattan, Newark International Airport and other places. He said he's actively looking for more sites, particularly in Jersey City, to do similar projects.

But developers in the space frequently run into a similar issue when seeking to build micro units in new markets: zoning laws.

Seattle-based Eagle Rock Ventures LLC has built several micro-unit projects, with residences averaging 200 square feet each, across the U.S. Its portfolio includes several projects in the Pacific Northwest, including one in Eugene, Oregon, wrapping up now.

More recently, Eagle Rock Ventures LLC has been building in fast-growing Sun Belt markets like Fort Worth, Texas; Nashville, Tennessee; and Asheville, North Carolina, frequently in a joint venture with local business partners.

But Eagle Rock is limited to places where zoning laws will allow for a residential project with no parking, said Scott Shapiro, managing director at the firm.

Shapiro said, as an example, the company sought to do a project in Bellevue, Washington, within a half-mile of a transit station, but would have to build parking as part of the development because of local regulations. None of Eagle Rock's projects are built with parking, instead targeting areas near transit lines and within walkable neighborhoods.

Not having parking also significantly reduces the cost of a development. Shapiro said it varies by market but units at its properties average $1,000 per month, including furnishings and utilities.

"If municipalities want to have more workhouse housing, they should allow developers to build product types that tenants desire," Shapiro said.

Even big cities, like Los Angeles, have laws that make doing micro-unit projects difficult or impossible, Shapiro continued. Schwebel and Shapiro said more municipalities have over the years looked at how to change regulations to allow different types of housing.

Last year, Eagle Rock's Seattle portfolio saw a dip in occupancy as some of its tenants — service workers who were laid off or furloughed, or young professionals working remotely — decided to leave, at least temporarily, Shapiro said. The company's portfolio has since come back to pre-pandemic occupancy levels, he added.

Schwebel said, despite pandemic trends that point to space being a new top priority, those who want to live in or near New York City put a premium on location.

"Space costs money," he said. "People are looking for more space if they can afford it. New York is New York because it’s vibrant, and people want to be in that vibrancy and density."

Shapiro said the 20- to 30-year-olds Eagle Rock is generally targeting with its projects want to be close to the action. He said the firm is banking on continued demand for the micro-unit product type and is actively looking for sites in fast-growing cities to do more projects.

Also since the pandemic, conversions of hotels into residential rental units have become popular across the U.S. Given the size of the average hotel room, which is a little more than 300 square feet, several of those overhauls would likely qualify as micro units.