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work, the gym, restaurants, coffee
shops and home. You don’t own a car,
allowing you to eliminate expenses
for gas, parking, registration, insurance
and repairs. Plus, you no longer waste
an hour a day sitting in traffic. Some
would call this paradise. It is not a far-off vision
— it is modern-day Seattle.
Ten years ago, Seattle-area developer Jim
Potter created micro housing, a new apartment
type based on walkability. Since then, his
model has been copied and refined across the
U.S., and not just in downtown neighborhoods. Many
projects were successful, but some were not.
Understanding how lenders safely invest in micro housing — generally
defined as small studio units between ISO and ASO square feet — requires
a clear understanding of modern tenant demand. Why do tenants live where they do?
Modern renters have far different priorities today versus 30 years ago. Big-screen TVs,
oversized couches and dining rooms are out. Connectivity, walkability and common
areas are in. Americans watch an average of five hours of TV per day, but much of this
content is now delivered via phone, tablet or laptop, which frees the tenant from the
In a similar trend, Americans are cooking at home less each year, allowing renters to
do away with much of their kitchen paraphernalia. A third trend is a delay in getting
married. The median age for marriage has steadily risen since bottoming out in the
1950s and 1960s. Combining these trends forms a picture of a person sitting alone,
eating food prepared by someone else and binge-watching their favorite shows, all
of which can be done virtually anywhere.
This does not mean tenant demand is expanding everywhere. In fact, the opposite
is true. In the book “The New Geography of Jobs,” economist Enrico Moretti says job
growth is increasingly concentrated in innovation hubs like San Francisco; Seattle;
San Diego; and Portland, Oregon. Every new Amazon or Google job creates several
others in the area, while increasing density, and higher incomes drive average rental
prices to record highs. High-income renters can afford the latest luxury high-rise, but
most other renters face an affordability crisis.
Consider a hypothetical example: Joe, a 28-year-old barista living in a Seattle
suburb and working downtown. He earns about $33,000 per year, the median income
for a rental household, and spends half of that on housing and transportation. Joe
scans the local listings on Craigslist and discovers that standard studio apartments
in Seattle cost $1,200 a month or more — well above his budget. He could find
a roommate, which would save some money but likely expose him to the myriad
issues of living with non-relatives.
Joe also could have his own place far outside the city at a more affordable price, but
part of that savings would be offset by increased fuel and maintenance costs due to the
long drives, as well as the daily loss of time. Faced with this choice — to overpay, crowd
in with roommates or commute from afar — what can a barista do?
Seattle-area developer Potter’s solution was to build very small studio
apartments, or micro units, near employment centers. Each location
had a high “walk score,” enabling tenants to walk to daily
destinations like work, shops and entertainment.
<<Micros continued from Page 63
vast majority of tenants
do not own cars, allowing
micro-apartment developers to build
more units while replacing costly parking
garages with bike storage and common rooms.
With home cooking on the decline, units include
kitchenettes. Full-size, common-area kitchens may
supplement a tenant’s needs. Units also typically
include a shower, toilet, sink, desk, chair and bed,
minimizing move-in time and costs.
The new design proved popular with a wide
variety of tenants, even some with higher incomes.
With near-zero transportation costs and rent prices
far below the local average, even Joe the barista
can save a good portion of his earnings for weekend
trips, tuition costs or a future downpayment on a
house. Fueled by pent-up demand, micro apartments
have sprung up across many cities, like Seattle, leasing
quickly and staying full.
Before he died, Potter described the advent of
micro units as the most exciting phenomenon in
his lifetime. One visionary micro-unit project, designed by Robert Pantley and located in the Seattle
area, was the U.S. Green Building Council award
winner for outstanding multifamily project. For the
residents of these innovative properties, the future
is an amazing place to live.
The micro-apartment product faces many challenges as it grows and expands, from city council
regulations and transportation infrastructure, to
the natural learning curve of developers and
lenders. Demand for the product should remain
robust and might even increase during economic
Lenders and developers — and consequently,
mortgage brokers who serve as intermediaries —
must ask which tenant they would rather rely upon:
Joe the barista, saving much of his paycheck while
living and serving up lattes downtown, or Joan
the department store manager, commuting from
a suburban garden-style complex to her retail job.
Peter Clasquin is a managing director at
Hunt Mortgage Group, a leading Fannie Mae
and Freddie Mac apartment lender. Clasquin
has financed a variety of micro apartments
through his Seattle correspondent GP Realty
Finance Inc. Reach Clasquin at (949) 221-6681
Source: Urban Land Institute
There is not a standard definition for a micro unit but, in
general, a studio apartment, one-bedroom apartment or
single-room occupancy unit under 500 square feet qualifies.
Major cities such as New York, Philadelphia, San Francisco and
Washington, D.C., have minimum-size requirements ranging
from 220-400 square feet. Micro-apartment buildings are
more expensive than traditional apartments to develop and
operate, but the per-square-foot rental income is higher.