The Commercial Real Estate Alpha Site

by Jay Parsons

Rental Housing Economist (Apartments, SFR), Speaker and Author Top Voice

Apartment supply is at the biggest levels in 40+ years. And yet the size of apartment units getting built has never been smaller. Developers — cutting square footage to try to contain rents — are hoping for a better response to the “smaller is better” strategy than they got in the post-GFC era of the early 2010s.

Soaring construction costs means developers must either pass along all those increases through rent — or find ways to limit rent. One way to do that is by building smaller units. And who can blame them? Rental affordability has been of increased importance in recent years, and developers must be able to convince their investors and lenders that there’s sufficient demand at pro forma rent levels.

Among apartment units completed in 2022 (the most recent year available), average unit sizes fell to 1,045 square feet — the lowest level on record — for newly built multifamily rental units. That’s down 7.5% from five years ago. And number could drop a bit further when 2023 data is released.

Reducing unit sizes is a normal response when affordability concerns heighten– as they did coming out of the COVID era. Remember that many of the units completed in 2022-23 were planned at a time when there were still significant concerns about the economy and renter health. While renters (and the U.S. economy) have proven far more resilient than many feared, the conversation hasn’t gone away.

This same trend happened after the Great Financial Crisis. Once demand returned and developers could get going again, that first wave of construction featured smaller unit sizes. Average sizes among completed units fell as low as 1,082 square feet in 2013.

But back in that era, the “smaller is better” strategy backfired. Many developers found they went too heavy on studios and small one-bedrooms. Renters wanted what they perceived as “normal sized” units. Two-bedrooms were as popular as ever. Smaller units took longer to lease.

So developers corrected. In the second half of the 2010s decade, unit sizes jumped back up.

Then COVID hit, and the “smaller is better” strategy returned.

Is this time different? Maybe. One nuance is unit mix. I’d be leery about skewing back toward studios and small one-bedrooms. Conversely, if you can find more creative ways to reduce square footage with similar unit mixes and in ways that are less obvious/disruptive to the resident, then it could work.

If you over-correct toward “smaller is better,” one risk is some renters could favor larger apartments built a few years ago — which are still, by and large, exceptionally nice and new, and could be cheaper in many cases, too.

How will it play out this time? Or why is this time different? Thoughts?

#multifamily #construction #housing #apartments Activate to view larger image,