The Real Deal New York

Macro economics meet micro apartments

Developers say tiny apartments are good business, but zoning changes are needed first
By Tom Acitelli | March 01, 2013 07:00AM

A micro-unit model on display at the Museum of the City of New York

After the proposal that Elisa Orlanski Ours worked on won the Bloomberg administration’s contest to design the city’s first micro-unit building, the Corcoran Sunshine executive started getting calls from developers. Five contacted Ours, who served as a creative and marketing consultant, asking questions about modular micro-unit development in New York City.

“It’s really getting down to the fact that New York is really ready for a new topology,” said Ours, Corcoran Sunshine’s vice president for planning and design.

The team that submitted the bid — nARCHITECTS, Monadnock Development LLC and the Actors Fund Housing Development Corp. — will create 55 apartments no bigger than 370 square feet at 335 East 27th Street (see related architectural review, “Stacking up micro-units”).

But many are now asking whether micro-units are financially viable for developers to construct without special treatment from the city. And could they work in buildings that are not all micro-units?

Indeed, the city not only provided the property for the low price of $500,000, but also waived a zoning regulation that required an apartment in a new building to be at least 400 square feet. The city will not provide additional subsidies for the roughly $15 million project, but those contributions were big financial sweeteners given how costly and time-consuming it can be to challenge zoning regulations.

Still, private developers who spoke to The Real Deal, including some of the contest’s finalists, said tiny micro-units would (and already do) financially pencil out. The only issue holding developers back, they say, are the zoning restrictions.

They predicted, however, that if 335 East 27th Street commands rents on par with market-rate studio apartments, it will be only a matter of time before the city lifts those zoning restrictions.

The upper limits of the project’s market-rate rents have not yet been released, but the 40 percent that have been set aside as affordable housing will range from $914 to $1,873 — depending on household size and annual income.

Matthew Blesso, president of Blesso Properties, said his firm was considering its submission — a 56-unit building called Max — well before the mayor announced the contest. Blesso and others said the city’s consistently high housing costs (coupled with strong demand for smaller affordable apartments) make developing micro-units appealing.

“There are definitely a lot of people willing to live in smaller spaces to save money,” said Blesso, whose submission called for units of no more than 250 square feet.

Mayor Bloomberg backed that point up, noting that the growth rate for one- and two-person households “greatly exceeds that of households with three or more people.” (There are about 1.8 million one- and two-person households in the city, but only about 1 million studio and one-bedroom apartments, according to city figures.)

One of the city’s leading developers, the Durst Organization, submitted a bid for a 60-unit building with apartments no more than roughly 300 square feet. Alexander Durst, the vice president who headed the firm’s contest effort, told TRD that micro-unit developments would work best in New York’s denser, more transit-oriented neighborhoods because the apartments are geared toward New Yorkers who spend a lot of time out of the home.

The firm’s rough price analysis comparing micro-units and studios, provided to TRD,determined that a 305-square-foot unit could rent for $1,950 versus $2,550 for a 550-square-foot studio in the same neighborhood. Rent for micro-units would, in fact, be in the same range as Manhattan studio rents, which on average fetched from $1,564 to $2,663 in January, according to data from appraisal firm Miller Samuel.

But what makes micro-units feasible to build, developers say, is the per-square-foot income: $76.72 for a micro-unit versus $55.64 for a studio, in the case of Durst’s analysis.

Plus, construction costs are similar for building micro-units as they are for standard studios and one-bedrooms: about $200 (or just slightly more) per square foot, depending on the location, experts say.

“I think it’s fairly negligible as far as the hard costs of building because the micro-unit is so much more intensive per square foot than even your typical small studio,” said Nicholas Lembo, president of Monadnock Development, part of the winning bid.

Some developers said they believed sprinkling micro-units throughout regular apartment buildings was also workable.

“We totally think micro-units can be interspersed with regular units in a building,” said developer Jonathan Rose, whose eponymous firm submitted a bid for a 60-unit development to the contest.

Mostly, though, developers, including Rose, spoke of micro-

units in terms of standalone developments — if the city ever changes its zoning regulations to allow them.

Perhaps the surest sign of private developers’ interest in building micro-units was the sheer response to the city’s design contest: A stunning 33 teams submitted proposals — the most the city’s Department of Housing Preservation and Development has ever received for a request for proposals. (The Museum of the City of New York is currently showcasing many of the proposals at an exhibit called “Making Room: New Models for Housing New Yorkers.”)

While the city has no plans to relax the zoning restrictions, the real estate industry is watching closely to see how quickly the Monadnock team leases 335 East 27th Street.

Right now, the only precedent for micro-units is those apartments that predate the city’s 400-square-foot requirement, which went into effect in 1987 — in addition to what one developer termed “the black market” of Craigslist, mostly illegally chopped up, larger units.

“People are living in them today,” said Abby Hamlin, president of Hamlin Ventures, whose firm was part of a team that proposed an 80-unit building called Tandem.

“You can’t build them today, but there are existing units in our housing stock that are under 400 square feet, and the market has shown that there’s demand for those,” Hamlin said. “In fact, there’s more demand than there is supply.”