Developers overlooking small units

Despite a lag at the top end of the market, smaller apartments are still moving as fast as an express subway train, with prices heading up and studio and one-bedrooms making up an increasing share of the overall sales market.

That could mean residential property developers are missing out on a lucrative market niche. Real estate experts who consult with developers say the market may be underbuilt in smaller apartments.

“Developers are shying away a bit from doing studios and small one-bedroom apartments,” said Richard Hamilton, a senior vice president with Halstead Property. “Maybe they think the demand isn’t there.”

Recent market statistics tell a different story. Third quarter market reports from Halstead and real estate appraiser Miller Samuel show that the strength in demand for smaller apartments is actually buoying an overall real estate market that’s seeing a bit of a dip in high-end prices.

In the third quarter of 2005, the average size of Manhattan apartments sold fell 14 percent to 1,169 square feet from the 1,358 square feet seen the previous quarter, according to Miller Samuel data. And studio and one-bedroom apartments made up 59 percent of all co-operative apartment sales, up from 55 percent in the second quarter.

“You have to ask yourself the question: Why did studios and one-bedroom apartments post the largest gains last quarter?” said Jonathan Miller, president and CEO of Miller Samuel.

While Miller believes part of that may have to do with buyers’ worries about rising interest rates, which is prompting them to buy smaller, more utilitarian apartments, another factor may be an oversupply of larger units.

“Development has really been targeting the upper end,” Miller said. And on the lower end, “such a lack of supply means less options for a buyer.”

All that means developers may be overlooking a potential windfall. In recent years, developers could typically get the highest price per square foot from larger units, but that pricepoint is changing, Miller said.

“We’ve started to see that studio apartments, especially in entry-level hot spots like Greenwich Village and Chelsea, are oftentimes more expensive than one-bedroom apartments on a per foot basis,” he said. “Just as we’ve learned there’s a diminishing return on a loft unit over 5,000 square feet, conversely, there’s a price threshold that the apartments won’t sell below no matter how small they are.”

With a residential real estate market apparently underbuilt in smaller units which is thereby driving up prices on those units real estate experts say developers may want to rethink their strategies.

“Looking forward, if I were determining my unit mix, I would probably throw in some studios just for fun,” said Eric Anton, senior managing director at Eastern Consolidated Properties. “I wouldn’t make every unit a three-bedroom or a four-bedroom apartment.”

Anton said the importance of location, which has been overlooked with this past decade’s robust residential real estate prices, has resurfaced for a certain buyer in a newly price-sensitive market.

“There’s still a wave of new people coming every year who don’t want $3 million apartments,” Anton said. “They want to get to work quickly, and they’ll give up square footage for that.”

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Besides these discretionary buyers, there remains a demand for smaller apartments among those who have traditionally purchased pied- -terres, such as businesses and empty nesters, Hamilton said.

“For people who are obviously not using these units all the time, because they have other houses, this is what they want,” he said. “Corporations may want a couple apartments to put their people in, and investors want these types of smaller apartments.”

Some property developers seem to be heeding the advice of their counsels, and some are looking toward smaller units even if they’ve always tried to balance their developments with a range of sizes.

LCOR, a national real estate development firm that purchased two land parcels in New York City recently, has always kept its eye on the market for smaller apartments, said senior vice president David Sigman.

With the strength seen in the lower end of the market, LCOR may focus on studio, one-bedroom and smaller two-bedroom apartments at its new developments, which include The Charleston at 225 East 34th Street, along with a building on Sixth Avenue between 24th and 25th streets.

“In terms of unit sizes, I wouldn’t say we’re small, but we’re not 15 Central Park West,” he said. “We’re doing a bit of a balancing act.”

Sigman said that the smaller units at the two residential developments will fall somewhere in between “tiny studios” and 1,000-square-foot one-bedroom apartments. “We’ve tried to find a size of product that still provides a level of amenities, but that at the same time isn’t overblown,” he said.

In case that balancing act topples, Hamilton recommended developers also consider designing their smaller units with a vision toward combination by buyers.

That way, developers can hedge and get the best of both worlds.

Andrew Gerringer, managing director of Prudential Douglas Elliman’s development marketing group, agreed, saying the brokerage has been advising developers throughout the past decade to consider the market for smaller units.

“There’s so much product that’s been planned, you never know what’s going to hit the market all at once,” he said. “So one of the things we’ve been very sensitive to is doing smaller units. And we’ve done them with an ability to combine them should the market change.”

While developers talk about having a jump on the market, they say that, in reality, it can be hard to plan a project that targets buyers a year or more in advance. Changing the mix of units offered, even late in the game, is one way of insulating a project from a market downturn.

Developers can play with unit mix and go from larger to smaller units in an attempt to protect their investment, said Barry Hersh, associate director of the Steven L. Newman Real Estate Institute at Baruch College.

“Developers do have alternatives,” he said. “They could change the product. They could say, instead of doing a more high-end product, I’ll go for a moderate project.”

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